S-1
As filed with the Securities and
Exchange Commission on April 3, 2007
Securities Act File
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPASS DIVERSIFIED
TRUST
(Exact name of Registrant as
specified in charter)
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Delaware
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7363
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57-6218917
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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COMPASS GROUP DIVERSIFIED
HOLDINGS LLC
(Exact name of Registrant as
specified in its charter)
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Delaware
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7363
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20-3812051
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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Sixty One Wilton Road
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
I. Joseph Massoud
Chief Executive
Officer
Compass Group Diversified
Holdings LLC
Sixty One Wilton Road
Second Floor
Westport, CT 06880
(203) 221-1703
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Stephen C. Mahon
Fred A. Summer
Squire, Sanders & Dempsey L.L.P.
312 Walnut Street
Cincinnati, OH 45202
(513) 361-1200
(513) 361-1201 Facsimile
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Michael P. Reed
Alston & Bird LLP
The Atlantic Building
950 F Street N.W.
Washington, D.C. 20004
(202) 756-3300
(202) 756-3333 Facsimile
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
CALCULATION OF REGISTRATION
FEE
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Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount Being
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Offering
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Aggregate
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Registration
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Security Being Registered
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Registered
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Price Per Security
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Offering Price(1)
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Fee
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Shares representing beneficial
interests in Compass Diversified Trust
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$156,400,000
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$4,802
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Non-management interests of Compass
Group Diversified Holdings LLC
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(2)
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(3)
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Total
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$156,400,000
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$4,802
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(1)
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Estimated solely for the purpose of
calculating the amount of the registration fee pursuant to
Rule 457(o) under the Securities Act of 1933, as amended.
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(2)
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Each share representing one
beneficial interest in Compass Diversified Trust corresponds to
one underlying non-management interest of Compass Group
Diversified Holdings LLC. If the trust is dissolved, each share
representing a beneficial interest in Compass Diversified Trust
will be exchanged for a non-management interest of Compass Group
Diversified Holdings LLC.
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(3)
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Pursuant to Rule 457(i) under
the Securities Act, no registration fee is payable with respect
to the non-management interests of Compass Group Diversified
Holdings LLC because no additional consideration will be
received by Compass Diversified Trust upon exchange of the
shares representing beneficial interests in Compass Diversified
Trust.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION,
DATED ,
2007
PRELIMINARY PROSPECTUS
Shares
Each Share Represents One Beneficial Interest in the Trust
We are offering to
sell shares
of Compass Diversified Trust, which we refer to as the trust.
Each share of the trust represents one undivided beneficial
interest in the trust property. The purpose of the trust is to
hold 100% of the trust interests of Compass Group Diversified
Holdings LLC, which we refer to as the company. Each beneficial
interest in the trust corresponds to one trust interest of the
company.
Compass Group Investments, Inc., through a wholly owned
subsidiary, has agreed to purchase, in a separate private
placement transaction to close in conjunction with the closing
of this offering, a number of shares in the trust having an
aggregate purchase price of approximately $30 million, at a
per share price equal to the public offering price (which will
be
approximately shares,
at the public offering price per share of
$ ).
The shares trade on the NASDAQ Global Select Market under the
symbol CODI.
On ,
2007, the closing price of the shares on the NASDAQ Global
Select Market was $ .
Investing in the shares involves risks. See the
section entitled Risk Factors beginning on
page 11 of this prospectus for a discussion of the risks
and other information that you should consider before making an
investment in our securities.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount and
commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters may also purchase up to an
additional shares
from us at the public offering price, less the underwriting
discount and commissions, within 30 days from the date of
this prospectus to cover overallotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
We expect to deliver the shares to the underwriters for delivery
to investors on or
about ,
2007.
Sole Bookrunner
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Citigroup
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Ferris, Baker Watts
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Incorporated
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BB&T Capital Markets
a division of Scott & Stringfellow,
Inc.
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Morgan Keegan &
Company, Inc.
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The date of this prospectus
is ,
2007
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with different information. We,
and the underwriters, are not making an offer of these
securities in any jurisdiction where the offer is not permitted.
You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front cover
of this prospectus.
In this prospectus, we rely on and refer to information and
statistics regarding market data and the industries of the
businesses we own that are obtained from internal surveys,
market research, independent industry publications and other
publicly available information, including publicly available
information regarding public companies. The information and
statistics are based on industry surveys and our managers
and its affiliates experience in the industry.
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties as they are not based on
historical facts, but rather are based on current expectations,
estimates, projections, beliefs and assumptions about our
businesses and the industries in which they operate. These
statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors, some of
which are beyond our control and difficult to predict and could
cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements. You should not
place undue reliance on any forward-looking statements, which
apply only as of the date of this prospectus.
i
SUMMARY
This summary highlights selected information appearing
elsewhere in this prospectus. For a more complete understanding
of this offering, you should read this entire prospectus
carefully, including the sections entitled Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the financial statements and the notes relating thereto.
Unless we tell you otherwise, the information set forth in this
prospectus assumes that the underwriters have not exercised
their overallotment option. Further, unless the context
otherwise indicates, numbers in this prospectus have been
rounded and are, therefore, approximate.
Compass Diversified Trust, which we refer to as the trust,
acquires and owns its businesses through a Delaware limited
liability company, Compass Group Diversified Holdings LLC, which
we refer to as the company. Except as otherwise specified,
references to Compass Diversified, we,
us and our refer to the trust and the
company and its businesses together. See the section entitled
Description of Shares for more information about
certain terms of the shares, trust interests and allocation
interests.
Overview
Compass Diversified Trust offers investors an opportunity to
participate in the ownership and growth of middle market
businesses that traditionally have been owned and managed by
private equity firms or other financial investors, large
conglomerates or private individuals or families. Through the
ownership of a diversified group of middle market businesses, we
also offer investors an opportunity to diversify their portfolio
risk while participating in the cash flows of our businesses
through the receipt of quarterly distributions.
We acquire and manage middle market businesses based in North
America with annual cash flows between $5 million and
$40 million. We seek to acquire controlling ownership
interests in the businesses in order to maximize our ability to
work actively with the management teams of those businesses. Our
model for creating shareholder value is to be disciplined in
identifying and valuing businesses, to work closely with
management of the businesses we acquire to grow the cash flows
of those businesses, and to exit opportunistically businesses
when we believe that doing so will maximize returns. We
currently own six businesses in six distinct industries and we
believe that these businesses will continue to produce stable
and growing cash flows over the long term, enabling us to meet
our objectives of growing distributions to our shareholders,
independent of any incremental acquisitions we may make, and
investing in the long-term growth of the company.
In identifying acquisition candidates, we target businesses that:
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produce stable cash flows;
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have strong management teams largely in place;
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maintain defensible positions in industries with forecasted
long-term macroeconomic growth; and
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face minimal threat of technological or competitive obsolescence.
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We maintain a long-term ownership outlook which we believe
provides us the opportunity to develop more comprehensive
strategies for the growth of our businesses through various
market cycles, and will decrease the possibility, often faced by
private equity firms or other financial investors, that our
businesses will be sold at unfavorable points in a market cycle.
Furthermore, we provide the financing for both the debt and
equity in our acquisitions, which allows us to pursue growth
investments, such as add-on acquisitions, that might otherwise
be restricted by the requirements of a third-party lender. We
have also found sellers to be attracted to our ability to
provide both debt and equity financing for the consummation of
acquisitions, enhancing the prospect of confidentiality and
certainty of consummating these transactions. In addition, we
believe that our ability to be long-term owners alleviates the
concern that many private company owners have with regard to
their businesses going through multiple sale processes in a
short period of time and the disruption that this may create for
their employees or customers.
1
We have a strong management team that has worked together since
1998 and, collectively, has approximately 75 years of
experience in acquiring and managing middle market businesses.
During that time, our management team has developed a reputation
for acquiring middle market businesses in various industries
through a variety of processes. These include corporate
spin-offs, transitions of family-owned businesses, management
buy-outs, management based
roll-ups,
reorganizations, bankruptcy sales and auction-based acquisitions
from financial owners. The flexibility, creativity, experience
and expertise of our management team in structuring complex
transactions provides us with strategic advantages by allowing
us to consider non-traditional and complex transactions tailored
to fit specific acquisition targets.
Our manager, who we describe below, has demonstrated a history
of growing cash flows at the businesses in which it has been
involved. As an example, for the four businesses we acquired
concurrent with our initial public offering, which we refer to
as the IPO, 2006 full-year operating income increased, in total,
over 2005 by approximately 20.5%. Our quarterly distribution
rate has increased by 14.3% from the IPO, on May 16, 2006
until January 2007, from $0.2625 per share to $0.30 per
share. From the date of the IPO until December 31, 2006
(including the distribution paid in January 2007 for the quarter
ended December 31, 2006), our distribution coverage ratio
(estimated cash flow available for distribution divided by total
distributions) was approximately 1.7x. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
Our
Businesses
To date, we have acquired controlling interests in the following
seven businesses:
Advanced
Circuits
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in Compass AC Holdings, Inc., which we
refer to as Advanced Circuits. Advanced Circuits, headquartered
in Aurora, Colorado, is a provider of prototype and quick-turn
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.
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
rather than on other factors, such as price. Advanced Circuits
meets this market need by manufacturing and delivering custom
PCBs in as little as 24 hours, providing its approximately
8,000 customers with approximately 98% error-free production and
real-time customer service and product tracking 24 hours
per day. Advanced Circuits had full-year operating income of
approximately $11.6 million for the year ended
December 31, 2006.
Aeroglide
On February 28, 2007, we acquired a controlling interest in
Aeroglide Corporation, which we refer to as Aeroglide.
Aeroglide, headquartered in Cary, North Carolina, is a leading
global designer and manufacturer of industrial drying and
cooling equipment. Aeroglide provides specialized thermal
processing equipment designed to remove moisture and heat as
well as roast, toast and bake a variety of processed products.
Its machinery includes conveyer driers and coolers, impingement
driers, drum driers, rotary driers, toasters, spin cookers and
coolers, truck and tray driers and related auxiliary equipment
and is used in the production of a variety of human foods,
animal and pet feeds and industrial products. Aeroglide utilizes
an extensive engineering department to custom engineer each
machine for a particular application. Aeroglide had full-year
operating income of approximately $3.1 million for the year
ended December 31, 2006.
Anodyne
On August 1, 2006, we acquired a controlling interest in
Anodyne Medical Device, Inc., which we refer to as Anodyne.
Anodyne, headquartered in Los Angeles, California, is a leading
manufacturer of medical support services and patient positioning
devices used primarily for the prevention and treatment of
pressure
2
wounds experienced by patients with limited or no mobility. On
October 5, 2006, Anodyne acquired the patient positioning
business of Anatomic Global, Inc. Anodyne is one of the
nations leading designers and manufacturers of specialty
support surfaces and is able to manufacture products in multiple
locations to better serve a national customer base. Anodyne had
operating income of approximately $0.3 million for the ten
and one-half month period ended December 31, 2006.
CBS
Personnel
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in CBS Personnel Holdings, Inc., which we
refer to as CBS Personnel. CBS Personnel, headquartered in
Cincinnati, Ohio, is a provider of temporary staffing services
in the United States. In order to provide its 4,000 clients with
tailored staffing services to fulfill their human resources
needs, CBS Personnel also offers employee leasing services,
permanent staffing and temporary-to-permanent placement
services. CBS Personnel operates 144 branch locations in various
cities in 18 states. CBS Personnel had full-year operating
income of approximately $21.1 million for the year ended
December 31, 2006.
Crosman
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in Crosman Acquisition Corporation, which
we refer to as Crosman. Crosman, headquartered in East
Bloomfield, New York, was one of the first manufacturers of
airguns and is a manufacturer and distributor of recreational
airgun products and related products and accessories. The
Crosman brand is one of the pre-eminent names in the
recreational airgun market and is widely recognized in the
broader outdoor sporting goods industry. Crosmans products
are sold in over 6,000 retail locations worldwide through
approximately 500 retailers, which include mass market and
sporting goods retailers. On January 5, 2007, we sold
Crosman on the basis of a total enterprise value of
approximately $143 million. We have reflected Crosman as a
discontinued operation for all periods presented in this
prospectus. For further information, see Note D
Discontinued Operations, to our consolidated
financial statements included elsewhere in this prospectus.
Crosman had full-year operating income of approximately
$17.6 million for the year ended December 31, 2006.
Halo
On February 28, 2007, we acquired a controlling interest in
Halo Branded Solutions, Inc., which we refer to as Halo, and
which operates under the brand names of Halo and Lee Wayne.
Halo, headquartered in Sterling, Illinois, serves as a one-stop
shop for over 30,000 customers, providing design, sourcing,
management and fulfillment services across all categories of its
customers 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
700 account executives. Halo had full-year operating income of
approximately $6.1 million for the year ended
December 31, 2006.
Silvue
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in Silvue Technologies Group, Inc., which
we refer to as Silvue. Silvue, headquartered in Anaheim,
California, is a developer and producer of proprietary, high
performance liquid coating systems used in the high-end eyewear,
aerospace, automotive and industrial markets. Silvues
patented coating systems can be applied to a wide variety of
materials, including plastics, such as polycarbonate and
acrylic, glass, metals and other surfaces. These coating systems
impart properties, such as abrasion resistance, improved
durability, chemical resistance, ultraviolet or UV protection,
anti-fog and impact resistance, to the materials to which they
are applied. Silvue has sales and distribution operations in the
United States, Europe and Asia, as well as manufacturing
operations in the United States and Asia. Silvue had full-year
operating income of approximately $6.7 million for the year
ended December 31, 2006.
3
Our
Manager
We have entered into a management services agreement with
Compass Group Management LLC, who we refer to as our manager or
CGM, 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. While working for a
subsidiary of Compass Group Investments, Inc., which we refer to
as CGI, our management team originally oversaw the acquisition
and operations of each of our initial businesses and Anodyne
prior to our acquiring them from CGI.
We pay our manager a quarterly management fee equal to 0.5%
(2.0% annualized) of our adjusted net assets as of the last day
of each fiscal quarter for the services it performs on our
behalf and reimburse our manager for certain expenses. In
addition, our manager is entitled to receive a profit allocation
upon the occurrence of certain trigger events and has the right
to cause the company to purchase the allocation interests upon
termination of the management services agreement. See Our
Manager Our Relationship with our Manager and
Supplemental Put Agreement and
Certain Relationships and Related Party Transactions
for further descriptions of the management fees and profit
allocation and our managers supplemental put right.
The companys 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
companys 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 a substantial majority of their time to
the affairs of the company. See Our Manager
Our Relationship with our Manager and Certain
Relationships and Related Party Transactions for further
descriptions of costs and expenses for which we typically
reimburse our manager.
Market
Opportunity
We believe that the merger and acquisition market for middle
market businesses is highly fragmented and provides
opportunities to purchase businesses at attractive prices. For
example, according to Mergerstat, during the twelve month period
ended December 31, 2006, businesses that sold for less than
$100 million were sold for a median of approximately 7.9x
the trailing twelve months of earnings before interest, taxes,
depreciation and amortization as compared to a median of
approximately 9.3x for businesses that were sold for between
$100 million and $300 million and 11.7x for businesses
that were sold for over $300 million. We expect to acquire
companies in the first two categories described above, and our
manager has, to date, typically been successful in consummating
attractive acquisitions at multiples at or below 7x the trailing
twelve months of earnings before interest, taxes, depreciation
and amortization, both on behalf of the company and prior to our
formation while working for a subsidiary of CGI. We believe that
among the factors contributing to lower acquisition multiples
for businesses of the size we target are the fact that sellers
of these businesses frequently consider non-economic factors,
such as continuing board membership or the effect of the sale on
their employees and customers, and that these businesses are
less frequently sold pursuant to an auction process.
Our
Strategy
In seeking to maximize shareholder value, we focus on the
acquisition of new platforms and the management of our existing
businesses (including acquisition of add-on businesses by those
existing businesses). While we continue to identify, perform due
diligence on, negotiate and consummate additional platform
acquisitions of attractive middle market businesses that meet
our acquisition criteria, we believe that our current businesses
alone will allow us to pay and grow distributions to our
shareholders.
4
Acquisition
Strategy
Our strategy for new platforms involves the acquisition of
businesses that we expect to be accretive to our cash flow
available for distribution. An ideal acquisition candidate for
us is a North American company which demonstrates a reason
to exist, that is, it is a leading player in its market
niches, has predictable and growing cash flows, operates in an
industry with long-term macroeconomic growth and has a strong
and incentivizable management team. We believe that attractive
opportunities to make such acquisitions will continue to present
themselves, as private sector owners seek to monetize their
interests and large corporate parents seek to dispose of their
non-core operations. We benefit from our managers ability
to identify diverse acquisition opportunities in a variety of
industries. In addition, we rely upon our management teams
experience and expertise in researching and valuing prospective
target businesses, as well as negotiating the ultimate
acquisition of such target businesses.
Management
Strategy
Our management strategy involves the active financial and
operational management of our businesses in order to improve
financial and operational efficiencies and achieve appropriate
growth rates. After acquiring a controlling interest in a new
business, we rely on our management teams experience and
expertise to work efficiently and effectively with the
management of the new business to jointly develop and execute a
business plan and to manage the business consistent with our
management strategy. In addition, we expect to sell businesses
that we own from time to time, when attractive opportunities
arise. Our decision to sell a business is based on our belief
that doing so will increase shareholder value to a greater
extent than would continued ownership of that business. Our sale
of Crosman is an example of our ability to successfully execute
this strategy. With respect to the sale of Crosman, we
recognized a gain of approximately $35.9 million having
owned Crosman for under eight months and having earned operating
income of $13.3 million through December 31, 2006.
Corporate
Structure
The trust is a Delaware statutory trust. Our principal executive
offices are located at Sixty One Wilton Road, Second Floor,
Westport, Connecticut 06880, and our telephone number is
203-221-1703.
Our website is at www.CompassDiversifiedTrust.com. The
information on our website is not incorporated by reference and
is not part of this prospectus.
We are
selling shares
of the trust in connection with this offering and an
additional shares
in the separate private placement transaction. Each share of the
trust represents one undivided beneficial interest in the trust
property. The purpose of the trust is to hold the trust
interests of the company, which is one of two classes of equity
interests in the company the trust interests, of
which 100% are held by the trust, and allocation interests, of
which 100% are held by our manager. The trust has the authority
to issue shares in one or more series. See the section entitled
Description of Shares for more information about the
shares, trust interests and allocation interests.
Your rights as a holder of trust shares, and the fiduciary
duties of the companys board of directors and executive
officers, and any limitations relating thereto are set forth in
the documents governing the trust and the company. The documents
governing the company specify that the duties of its directors
and officers are generally consistent with the duties of a
director of a Delaware corporation. Investors in the trust
shares will be treated as beneficial owners of trust interests
in the company.
The companys board of directors oversees the management of
the company and our businesses and the performance by our
manager. The companys board of directors is comprised of
seven directors, all of whom were initially appointed by our
manager, as holder of the allocation interests, and four of whom
are the companys independent directors. Six of the
directors are elected by our shareholders in three staggered
classes.
As holder of the allocation interests, our manager has the right
to appoint one director to the companys board of
directors, subject to adjustment. An appointed director will not
be required to stand for election by our shareholders. See the
section entitled Description of Shares Voting
and Consent Rights Board of Directors
Appointee for more information about our managers
right to appoint a director.
5
An illustration of our organizational structure is set forth
below.
6
The
Offering
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Shares offered by us in this offering. |
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shares |
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Shares outstanding after this offering and the separate private
placement transaction |
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shares |
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Use of proceeds |
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We estimate that our net proceeds from the sale of the shares in
this offering will be approximately
$ million
(or approximately
$ million
if the underwriters overallotment option is exercised in
full). We intend to use the net proceeds from this offering and
the $30 million of proceeds from the separate private placement
transaction to repay borrowings under our revolving credit
facility and any remaining amounts for general corporate
purposes. See the section entitled Use of Proceeds
for more information about the use of the proceeds of this
offering. |
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NASDAQ Global Select Market symbol |
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CODI |
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Dividend and distribution policy |
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We intend to declare and pay regular quarterly cash
distributions on all outstanding shares, based on distributions
received by the trust on the trust interests in the company. The
declaration and amount of any distributions will be subject to
the approval of the companys board of directors, which
will include a majority of independent directors, and will be
based on the results of operations of our businesses and the
desire to provide sustainable levels of distributions to our
shareholders. Any cash distribution paid by the company to the
trust will, in turn, be paid by the trust to its shareholders. |
|
|
|
See the sections entitled Dividend and Distribution
Policy for a discussion of our intended distribution rate
and Material U.S. Federal Income Tax
Considerations for more information about the tax
treatment of distributions by the trust and the company. |
|
Shares of the trust |
|
Each share of the trust represents an undivided beneficial
interest in the trust property, and each share of the trust
corresponds to one underlying trust interest of the company
owned by the trust. Unless the trust is dissolved, it must
remain the sole holder of 100% of the trust interests, and at
all times the company will have outstanding the identical number
of trust interests as the number of outstanding shares of the
trust. If the trust is dissolved, each share of the trust will
be exchanged for one trust interest in the company. Each
outstanding share of the trust is entitled to one vote on any
matter with respect to which the trust, as a holder of trust
interests in the company, is entitled to vote. The company, as
the sponsor of the trust, will provide to our shareholders proxy
materials to enable our shareholders to exercise, in proportion
to their percentage ownership of outstanding shares, the voting
rights of the trust, and the trust will vote its trust interests
in the same proportion as the vote of holders of shares. The
allocation interests do not grant to our manager voting rights
with respect to the company except in certain limited
circumstances. |
7
|
|
|
|
|
See the section entitled Description of Shares for
information about the material terms of the shares, the trust
interests and allocation interests. |
|
U.S. federal income tax considerations |
|
Subject to the discussion in Material U.S. Federal
Income Tax Considerations, neither the trust nor the
company will incur U.S. federal income tax liability;
rather, each holder of trust shares will be required to take
into account his or her allocable share of company income, gain,
loss, deduction, and other items. The trust is currently seeking
approval from the shareholders of record as of April 10,
2007, to authorize the board to amend the trust agreement to
provide that the trust be taxed as a partnership. Assuming that
approval is granted, the trust will report tax information to
the shareholders for the 2007 taxable year and all future
taxable years thereafter on
Schedule K-1.
If that approval is not granted, the trustees intend to dissolve
the trust and each shareholder would receive a direct interest
in the company in exchange for their shares in the trust. If
that occurs, the company will continue to treat the trust as a
grantor trust for the initial portion of the 2007 tax year and
the trust will report the same tax information as found on the
Schedule K-1
to the shareholders on Form 1041. |
|
|
|
See the section entitled Material U.S. Federal Income
Tax Considerations for information about the potential
U.S. federal income tax consequences of the purchase,
ownership and disposition of shares and for a discussion of
recent developments concerning treatment of the trust as a
grantor trust for federal income tax purposes. |
|
Risk factors |
|
Investing in our shares involves risks. See the section entitled
Risk Factors and read this prospectus carefully
before making an investment decision with the respect to the
shares or the company. |
The number of shares to be outstanding after this offering is
based on the shares outstanding as of December 31, 2006.
Except as otherwise noted, all information in this prospectus
assumes that the underwriters overallotment option is not
exercised. If the overallotment option is exercised in full, we
will issue and sell an
additional shares.
8
Summary
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 prospectus. On January 5, 2007, we
executed a purchase and sale agreement to sell our
majority-owned subsidiary, Crosman, for approximately
$143 million in cash. As a result, the operating results of
Crosman for the period of its acquisition by us (May 16,
2006) through December 31, 2006 are being reported as
discontinued operations in accordance with SFAS 144, and as
such are not included in the data below. We will recognize a
gain of approximately $35.9 million from the sale of
Crosman in fiscal 2007.
Selected financial data below includes the results of
operations, cash flow and balance sheet data of the company for
the years ended December 31, 2005 and 2006. We were
incorporated on November 18, 2005, which we refer to as our
inception. Financial data included for the year ended
December 31, 2005, therefore only includes the minimal
activity experienced from inception to December 31, 2005.
We completed the IPO on May 16, 2006 and used the proceeds
from the IPO, separate private placement transactions that
closed in conjunction with the IPO and our third party credit
facility to purchase controlling interests in four businesses.
On August 1, 2006, we purchased a controlling interest in
an additional operating subsidiary, Anodyne. Financial data
included below therefore only includes activity in our
businesses from May 16, 2006 through December 31,
2006, and in the case of Anodyne, from August 1, 2006
through December 31, 2006.
Because we acquired Aeroglide and Halo in February 2007,
financial data is not presented for these businesses.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands, except per share data)
|
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
410,873
|
|
|
$
|
|
|
Cost of sales
|
|
|
311,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
99,232
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Staffing
|
|
|
34,345
|
|
|
|
|
|
Selling, general and administrative
|
|
|
36,732
|
|
|
|
1
|
|
Management fee
|
|
|
4,376
|
|
|
|
|
|
Supplemental put expense
|
|
|
22,456
|
|
|
|
|
|
Research and development expense
|
|
|
1,806
|
|
|
|
|
|
Amortization expense
|
|
|
6,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(7,257
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(27,636
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations, net of income tax
|
|
$
|
8,387
|
|
|
$
|
|
|
Net loss
|
|
$
|
(19,249
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
20,563
|
|
|
$
|
|
|
Cash (used in) investing activities
|
|
|
(362,286
|
)
|
|
|
|
|
Cash provided by financing
activities
|
|
|
351,073
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
9,350
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Basic and fully diluted loss from
continuing operations per share
|
|
$
|
(2.18
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted loss per
share
|
|
$
|
(1.52
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
140,356
|
|
|
$
|
3,408
|
|
Total assets
|
|
|
525,597
|
|
|
|
3,408
|
|
Current liabilities
|
|
|
162,872
|
|
|
|
3,309
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
242,755
|
|
|
|
3,309
|
|
Minority interests
|
|
|
27,131
|
|
|
|
100
|
|
Shareholders equity (deficit)
|
|
|
255,711
|
|
|
|
(1
|
)
|
9
Managements estimated cash available for distribution as
of December 31, 2006 is approximately $23.7 million.
Cash available for distribution is a non-GAAP measure that we
believe provides additional information to evaluate our ability
to make anticipated quarterly distributions. The table below
details cash receipts and payments that are not reflected on our
income statement in order to provide cash available for
distribution. Cash available for distribution is not necessarily
comparable with similar measures provided by other entities. We
believe that cash available for distribution, together with
future distributions and cash available from our businesses (net
of reserves) will be sufficient to meet our anticipated
distributions over the next twelve months. The table below
reconciles cash available for distribution to net income and to
cash flow provided by operating activities, which we consider to
be the most directly comparable financial measure calculated and
presented in accordance with GAAP.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
($ in thousands)
|
|
|
Net loss
|
|
$
|
(19,249
|
)
|
Adjustment to reconcile net loss
to cash provided by operating activities
|
|
|
|
|
Depreciation and amortization
|
|
|
10,290
|
|
Supplemental put expense
|
|
|
22,456
|
|
Silvues in-process R&D
expensed at acquisition date
|
|
|
1,120
|
|
Advanced Circuits loan
forgiveness accrual
|
|
|
2,760
|
|
Minority interest
|
|
|
2,950
|
|
Deferred taxes
|
|
|
(2,281
|
)
|
Loss on Ableco debt retirement
|
|
|
8,275
|
|
Other
|
|
|
(450
|
)
|
Changes in operating assets and
liabilities
|
|
|
(5,308
|
)
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
20,563
|
|
Plus:
|
|
|
|
|
Unused fee on delayed term loan(1)
|
|
|
1,291
|
|
Changes in operating assets and
liabilities
|
|
|
5,308
|
|
Less:
|
|
|
|
|
Maintenance capital expenditures(2)
|
|
|
|
|
CBS Personnel
|
|
|
209
|
|
Crosman(3)
|
|
|
1,926
|
|
Advanced Circuits
|
|
|
392
|
|
Silvue
|
|
|
304
|
|
Anodyne
|
|
|
636
|
|
|
|
|
|
|
Estimated cash flow available for
distribution
|
|
$
|
23,695
|
(a)
|
|
|
|
|
|
Distribution paid July 2006
|
|
$
|
(2,587
|
)
|
Distribution paid September 2006
|
|
|
(5,368
|
)
|
Distribution paid January 2007
|
|
|
(6,135
|
)
|
|
|
|
|
|
Total distributions
|
|
$
|
(14,090
|
)(b)
|
|
|
|
|
|
Distribution Coverage
Ratio(a)¸(b)
|
|
|
1.7
|
x
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the commitment fee on the unused portion of our
third-party loans. |
|
(2) |
|
Represents maintenance capital expenditures that were funded
from operating cash flow and excludes approximately
$2.3 million of growth capital expenditures for the period
ended December 31, 2006. |
|
(3) |
|
Crosman was sold on January 5, 2007 (see Note D to the
consolidated financial statements). |
Cash flows of certain of our businesses are seasonal in nature.
Cash flows from CBS Personnel 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 higher in the fourth quarter of each year than in
other quarters due to increased seasonal demands for calendars
and other promotional products among other factors.
10
RISK
FACTORS
An investment in our shares involves a high degree of risk.
You should carefully read and consider all of the risks
described below, together with all of the other information
contained or referred to in this prospectus, before making a
decision to invest in our shares. If any of the following events
occur, our financial condition, business and results of
operations (including cash flows) may be materially adversely
affected. In that event, the market price of our shares could
decline, we may be unable to pay distributions on our shares and
you could lose all or part of your investment. Throughout this
section we refer to our current businesses and the businesses we
may acquire in the future collectively as our
businesses.
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 approximately 75 years of experience in
acquiring and managing middle market businesses, our failure to
continue to develop and maintain effective systems and
procedures, including accounting and financial reporting
systems, or to manage our operations as a consolidated public
company, may negatively impact our ability to optimize the
performance of the company, which could adversely affect our
ability to pay distributions to our shareholders. In that case,
our consolidated financial statements might not be indicative of
our financial condition, business and results of operations.
Our
consolidated financial statements will not include meaningful
comparisons to prior years.
Our audited financial statements only include consolidated
results of operations and cash flows for the period from
May 16, 2006 through December 31, 2006. Consequently,
meaningful
year-to-year
comparisons are not available and will not be available, at the
earliest, until the completion of fiscal 2008.
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
has employment agreements with certain of its employees,
including our chief financial officer, these employment
agreements may not prevent our managers employees from
leaving our manager or from competing with us in the future. Our
manager does not have an employment agreement with our chief
executive officer.
In addition, 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 seek to provide such persons with equity
incentives in their respective businesses and to have employment
agreements
and/or
non-competition agreements with certain persons we have
identified as key to their businesses. However, these measures
do not ensure performance of key personnel, and may not prevent
them from departing or competing with our businesses in the
future. 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 are
a holding company with no operations and rely entirely on
distributions from our businesses to make distributions to our
shareholders.
The trusts only business is holding trust interests 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
11
distributions or dividends on equity to enable us, first, to
satisfy our financial obligations, including payments under our
revolving credit facility, the management fee, profit allocation
and put price, and, second, make distributions to our
shareholders. The ability of our businesses to make
distributions to us 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 distributions from our businesses,
we may not be able to declare, or may have to delay or cancel
payment of, distributions to our shareholders, which may have a
material adverse effect on the market price of our shares. See
Dividend and Distribution Policy Restrictions
on Distribution Payments for a more detailed discussion of
these restrictions.
We do not own 100% of our businesses. While the company will
receive cash payments from our businesses in the form of
interest payments, debt repayment and dividends and
distributions, if any dividends or distributions are paid by our
businesses, they will be shared pro rata with the minority
shareholders of our businesses and the amounts of distributions
made to minority shareholders will not be available to us for
any purpose, including payment of our obligations or
distributions to our shareholders. Any proceeds from the sale of
a business, after payment of the profit allocation to our
manager, will be allocated among us and the minority
shareholders of the business that is sold; however, we will not
necessarily declare a distribution to our shareholders with
respect to such proceeds.
While
we intend to make regular cash distributions to our
shareholders, the companys 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 companys 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, put price and payments under our revolving
credit facility, are 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
companys 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. See Dividend and Distribution
Policy Restrictions on Distribution Payments
for a more detailed discussion of these restrictions.
We may
not be able to successfully fund future acquisitions of new
businesses due to the unavailability 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 and the revolving credit facility or other credit
agreements we may enter into in the future may contain terms
that prohibit us from making acquisitions that may be otherwise
advantageous. 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.
12
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 new
businesses, which we refer to as new platforms, as well as to
acquire add-on businesses to our existing platforms. 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. Further, the time and costs associated with
identifying and evaluating potential target businesses and their
industries may cause a substantial drain on our financial
resources and our management teams attention. In addition,
we and our businesses may have difficulty effectively managing
or integrating acquisitions. We may experience greater than
expected costs or difficulties relating to such acquisitions, 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.
The
companys 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 (or if the trust is dissolved, as a
direct owner of trust interests in the company), you may
disagree with changes made to the terms of our shares or trust
interests in the company, and you may disagree with the
companys board of directors decision that the
changes made to the terms of the shares or trust interests in
the company 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 and the LLC agreement give broad authority and
discretion to our board of directors. However, neither the trust
agreement nor the LLC agreement relieve the companys 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 (or if the trust is dissolved, the trust
interests in the company) to be issued to raise additional
equity.
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 companys 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 the chairman of the companys board of directors
to fill vacancies on the companys board of directors until
the 2008 annual meeting of shareholders;
|
|
|
|
allowing only the companys 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, by a vote of 85% of our shareholders;
|
|
|
|
requiring advance notice for nominations of candidates for
election to the companys board of directors or for
proposing matters that can be acted upon by our shareholders at
a shareholders meeting;
|
|
|
|
authorizing a substantial number of additional authorized but
unissued shares that may be issued without shareholder action;
|
13
|
|
|
|
|
providing the companys board of directors with certain
authority to amend the LLC agreement, subject to certain voting
and consent rights of the holders of trust interests and
allocation interests, and the trust agreement, subject to
certain voting and consent rights of the holders of the trust
shares;
|
|
|
|
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 companys board of directors or a hostile
takeover; and
|
|
|
|
limitations regarding shareholders calling special meetings and
acting by written consent.
|
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 and therefore the best interests of 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 those directors. Such
decisions, therefore, may be different from those that we would
otherwise make.
Our
third party revolving 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 February 28, 2007, we had approximately
$97.4 million of debt outstanding and we expect to increase
our level of debt in the future. The revolving credit facility
contains various covenants, including financial covenants, with
which we must comply. The financial covenants include:
(i) a requirement to maintain, on a consolidated basis, a
fixed coverage ratio of at least 1.5:1, (ii) an interest
coverage ratio not to exceed less than 3:1 and (iii) a
total debt to earnings before interest, depreciation and
amortization ratio not to exceed 3:1. In addition, the revolving
credit facility contains limitations on, among other things,
certain acquisitions, consolidations, sales of assets and the
incurrence of debt. Currently we are in compliance with all
covenants. Outstanding indebtedness under the revolving credit
facility will mature on November 21, 2011.
If we violate any of these or other covenants, our lender may
accelerate the maturity of any debt outstanding and we may be
prohibited from making any distributions to our shareholders.
Our 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 revolving credit facility bears interest at floating rates
which will generally change as interest rates change. We have
not hedged our exposure to interest rates on our revolving
credit facility but may consider doing so in the future. If we
do not hedge such exposure, 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. In addition, the
interest rates under our revolving credit facility vary
depending on certain financial ratios; therefore, if we fail to
achieve these ratios, we will be obligated to pay additional
interest.
14
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.
CGI
may exercise significant influence over the
company.
CGI, through a wholly owned subsidiary, currently owns 7,350,000
or 35.9% of our shares and will purchase an
additional shares
in a separate private placement transaction. As a result, CGI
will own approximately 30.2% of our shares and may have
significant influence over the company, including the election
of directors, in the future as well as matters requiring the
approval of our shareholders, including the removal of our
manager.
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, require us to add directors who
are independent of us or our manager, divert the attention of
our management team and otherwise will subject us to additional
regulation that will be costly and time-consuming. In addition,
if we are required to register as an investment company we will
no longer satisfy the requirements to be treated as a publicly
traded partnership exempt from taxation as a corporation for
federal income tax purposes.
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,
will devote 100% of his time to our affairs. Mr. I.
Joseph Massoud, our chief executive officer, and our directors,
manager and other members of our management team may engage in
other business activities. This may result in a conflict of
interest in the allocation of their time between their
management and operations of our businesses and their 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 the IPO, or affiliates of CGI or 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 a
discussion of the potential conflicts of interest of which you
should be aware.
15
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 companys acquisition and disposition
criteria to the companys 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
managers or our management teams investment in or
management of businesses that compete with our businesses may
result in conflicts of interest that are not resolved in favor
of our businesses, which may adversely affect our financial
condition, business and results of operations.
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
companys acquisition or disposition
criteria.
Our manager will review any acquisition or disposition
opportunity presented to our manager to determine if it
satisfies the companys acquisition or disposition
criteria, as established by the companys 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 companys 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
companys 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
companys 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 our financial condition, business
and results of operations.
Under the terms of the management services agreement, our
manager cannot be removed as a result of underperformance.
Instead, the companys board of directors can only remove
our manager in certain limited circumstances or upon a vote by
the majority of the companys board of directors and the
majority of our shareholders to terminate the management
services agreement. If our manager underperforms, this
limitation could materially adversely affect our financial
condition, business and results of operations.
We may
have difficulty severing ties with our chief executive officer,
Mr. Massoud.
Under the management services agreement, the companys
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, we may
have difficulty completely severing ties with Mr. Massoud
unless we terminate the management services agreement and our
relationship with our manager in which case we may be required
to purchase the allocation interests of the company held by our
manager at a significant cost to us.
16
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 managers resignation or if
our manager resigns on any date that is at least three years
after May 16, 2006 (the closing of the IPO), 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,
such purchase would be a significant expense to us and would
adversely affect our financial condition and results of
operations, 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.
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, would receive in connection with the sale of our
businesses or, at our managers option, after a controlling
interest in a business has been held for five years. At any
point in time, the supplemental put liability recorded on the
companys balance sheet is our managers estimate of
what its allocation interests are worth based upon a percentage
of the increase in fair value of our businesses over our basis
in those businesses. Because the supplemental put price would be
calculated based upon an assumed profit allocation for the sale
of all of our businesses, the growth of the supplemental put
liability over time is indicative of our managers estimate
of the companys unrealized gains on its interests in our
businesses. A decline in the supplemental put liability is
indicative either of the realization of gains associated with
the sale a business and the corresponding payment of a profit
allocation to our manager (as with Crosman), or a decline in our
managers estimate of the companys unrealized gains
on its interests in our businesses. We account for the change in
the estimated value of the supplemental put liability on a
quarterly basis in our income statement. The expected value of
the supplemental put liability effects our results of operation
but it does not affect our cash flows or our cash flow available
for distribution. The valuation of the supplemental put
agreement requires the use of complex models, which require
highly sensitive 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.
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
17
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.
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 companys 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. 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 companys net income.
We
cannot determine the amount of the management fee that will be
paid over time with any certainty.
The management fee for the year ended December 31, 2006,
was $4.4 million. The management fee is calculated by
reference to the companys adjusted net assets at the end
of each fiscal quarter, 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. Changes in adjusted net assets
and in the resulting management fee could be significant,
resulting in a material adverse effect on the companys
results of operations.
We
cannot determine the amount of profit allocation that will be
paid over time with any certainty.
Because the profit allocation is triggered by the sale of one or
our businesses or, at our managers election, ownership of
one of our businesses for a period of five years, 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.
The
fees to be paid to our manager pursuant to the management
services agreement, the offsetting management services
agreements and transaction services agreements, the profit
allocation and put price to be paid to our manager as holder of
the allocation interests, pursuant to the LLC agreement may
significantly reduce the amount of cash flow 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 upon the occurrence of certain
trigger events. 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
sections entitled Our Manager Our Relationship
with Our Manager and Supplemental Put
Agreement and 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.
18
Our
managers influence on conducting our operations, including
on our engaging in acquisition or disposition transactions,
gives it the ability to increase its fees and compensation to
our chief executive officer, which may reduce the amount of cash
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 companys adjusted net assets for certain items and is
unrelated to net income or any other performance base or
measure. Our manager, which our chief executive officer,
Mr. Massoud, controls, may advise us to consummate
transactions, incur third party debt or conduct our operations
in a manner that, in our managers 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. Massouds compensation is paid by our
manager from the management fee it receives from the company.
Our managers 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
managers 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 and by our businesses under offsetting
management services agreements.
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
addition to 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
managers 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 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 companys board of directors at a time
that may not optimal for our shareholders.
The
obligations to pay the management fee, profit allocation or 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, profit allocation or 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
The
status of the trust for tax purposes is uncertain in light of a
recent Internal Revenue Service pronouncement and certain
actions of the company in response thereto.
The Internal Revenue Service, which we refer to as the IRS, has
recently issued a pronouncement stating its position that a
grantor trust owning interests in a limited liability company,
on facts very similar to our current structure, would be treated
as a partnership for federal income tax purposes, and not as a
19
grantor trust. The rationale for this position is that the
overall arrangement permits a variance in the investment of the
shareholders, even though the trustees of the trust do not have
that power directly.
In light of this development, the company expects to submit to
its shareholders for approval an amendment to the trust
agreement that would permit our board to amend the trust
agreement to provide that the trust be treated as a tax
partnership effective January 1, 2007, and has also
initiated discussions with the IRS with respect to a closing
agreement that would permit the trust to be treated as a grantor
trust with respect to the 2006 taxable year, and possibly a
portion of the 2007 taxable year if shareholder approval is not
obtained. See Material U.S. Federal Income Tax
Considerations. If the company is not able to
satisfactorily conclude a closing agreement, the IRS may
challenge the tax status of the trust for 2006 and the portion
of 2007 that it is in existence and if successful the trust may
lose an opportunity to effectively make an election under
Section 754 of the Internal Revenue Code of 1986, as
amended, which we refer to as the Code, although it intends to
take actions to minimize this risk.
All of
the companys income could be subject to a corporate
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.
It is expected that either the trust or the company will be
treated as a publicly traded partnership exempt from taxation as
a corporation and thus neither the trust nor the company will be
subject to a corporate entity-level tax in the United States.
See Material U.S. Federal Income Tax
Considerations. If the trust or the company fails to
satisfy the qualifying income tests or any other
requirements to be treated as a publicly traded partnership
exempt from taxation as a corporation, it 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. Under the qualifying
income tests, the trust or company would be treated as a
corporation unless each year more than 90% of the gross income
of the trust or the company, as the case may be, will consist of
dividends, interest (other than interest derived in the conduct
of a financial or insurance business or interest the
determination of which depends in whole or in part on the income
or profits of any person) and gains from the sale of stock or
debt instruments which are held as capital assets. Taxation of
the trust or the company as a corporation could result in a
material reduction in distributions to our shareholders and,
thus, would likely result in a reduction in the value of, or
materially adversely affect the market price of, the shares of
the trust.
Our
shareholders will be subject to tax on their share of the
companys 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) qualifies to be treated as a publicly traded
partnership exempt from taxation as a corporation, shareholders
will be allocated their share of the companys taxable
income, whether or not the shareholders receive distributions
from the trust. See the discussion in Material
U.S. Federal Income Tax Considerations. 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 companys 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 that 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 trust.
Shareholders may also realize income in excess of distributions
due to the companys use of cash from operations or sales
proceeds for uses other than to make distributions to
shareholders, including to fund acquisitions, satisfy short- and
long-term working capital needs of our businesses, or satisfy
known or unknown liabilities. In addition, certain financial
covenants with the companys lenders may limit or prohibit
the distribution of cash to shareholders. The companys
board of directors is also free to change the companys
distribution policy. The company is under no obligation to
20
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.
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, 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 shareholders amount realized on
the sale will include not only the sales price of the shares but
also the shareholders portion of the companys debt
allocable to his shares (which is treated as proceeds from the
sale of those shares). Depending on the nature of the
companys 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.
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 our
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
present U.S. federal income tax treatment of an investment
in our 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 publicly
traded partnership exempt from taxation 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 our board to modify our operating
agreement from time to time, without the consent of the holders
of our 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 our shares.
Risks
Relating Generally to Our Businesses
Our
businesses are or may be vulnerable to economic fluctuations and
seasonal factors as demand for their products and services tends
to decrease as economic activity slows.
Demand for the products and services provided by our businesses
is sensitive to changes in the level of economic activity in the
regions and industries in which they do business. For example,
as economic activity slows down, companies often reduce their
use of temporary employees and their research and development
spending. In addition, spending on capital equipment may also
decrease in an economic slow down. Regardless of the industry,
pressure to reduce prices of goods and services in competitive
industries
21
increases during periods of economic downturns, which may cause
compression on our businesses financial margins. Certain
of our businesses are subject to fluctuations in demand due to
seasonal factors, which may cause the results of operations to
vary significantly from quarter to quarter. In addition,
economic downturns may negatively impact the demands or ability
to pay of customers of our businesses. As a result, a
significant economic downturn could have a material adverse
effect on the business, results of operations and financial
condition of each of our businesses and therefore on our
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
affected.
The future success of some of our businesses depends upon the
continued service of their technical employees 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 employees with comparable experience because
competition for such employees is intense. If our businesses are
not able to replace their technical employees with new employees
or attract additional technical employees, 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.
Our
businesses 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 others 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.
Our businesses success depends in part on their, or
licenses to use others, brand names, proprietary
technology and manufacturing techniques. Our 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 could reduce or eliminate any competitive advantage they
have developed, cause them to lose sales or otherwise harm their
business.
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
managements 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.
22
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 experience
periodic technological changes and ongoing product improvements.
Their results of operations depend significantly on the
development of commercially viable new products, product
upgrades 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 demands 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.
Our
businesses do 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 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 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 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
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. Compliance with such laws and regulations
currently in place and those that may be enacted in the future
will require significant expenditures. 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.
23
Some
of our businesses rely and may rely on suppliers for the timely
delivery of materials used in manufacturing their products.
Shortages or price fluctuations in component parts specified by
their customers could limit their ability to manufacture certain
products, delay product shipments, or cause them to breach
supply contracts, all of which may materially adversely affect
our financial condition, business and results of
operations.
Our financial condition, business and operations could be
materially adversely affected if our businesses are unable to
obtain adequate supplies of raw materials in a timely manner.
Strikes, fuel shortages and delays of providers of logistics and
transportation services could disrupt our businesses and reduce
sales and increase costs. Many of the products our businesses
manufacture require one or more components that are supplied by
third parties. Our businesses generally do not have any
long-term supply agreements. Therefore our businesses
suppliers could cease supplying materials to our businesses at
any time, which would require our businesses to find new
suppliers, resulting in possible manufacturing delays and
increased costs. At various times, there are shortages of some
of the components that they use, as a result of strong demand
for those components or problems experienced by suppliers.
Suppliers of these raw materials may from time to time delay
delivery, limit supplies or increase prices due to capacity
constraints or other factors, which could materially adversely
affect our businesses ability to deliver products on a
timely basis. In addition, supply shortages for a particular
component can delay production of all products using that
component or cause cost increases in those products. Our
businesses inability to obtain these needed materials may
require them to acquire supplies at higher costs or redesign or
reconfigure products to accommodate substitute components, which
would slow production or assembly, delay shipments to customers,
increase costs and reduce operating income. Our businesses may
bear the risk of periodic component price increases, which could
increase costs and reduce operating income.
In addition, our businesses may purchase components in advance
of their requirements for those components as a result of a
threatened or anticipated shortage. In this event, they will
incur additional inventory carrying costs, for which they may
not be compensated, and have a heightened risk of exposure to
inventory obsolescence. If they fail to manage their inventory
effectively, our businesses may bear the risk of fluctuations in
materials costs, scrap and excess inventory, all of which may
materially adversely affect their financial condition, business
and results of operations.
Our
businesses could experience fluctuations in the costs of raw
materials as a result of inflation and other economic
conditions, which 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 13.4% of the total
cost of goods sold in 2006. Prices for key raw materials such as
these may fluctuate during periods of high demand. The ability
by our businesses to offset the effect of increases in raw
material prices by increasing their prices is uncertain. If our
businesses are unable to cover price increases of these raw
materials, their financial condition, business and results of
operations could be materially adversely affected.
Defects
in the products provided by our businesses could result in
financial or other damages to their customers, which could
result in reduced demand for our businesses products
and/or
liability claims against our businesses.
Some of the products our businesses produce could potentially
result in product liability suits against them. Some of our
businesses 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 businesses. If these defects occur
frequently, our reputation may be impaired. Defects in products
could also result in financial or other
24
damages to customers, for which our businesses 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 our financial condition, business and results of
operations.
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 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.
Our
businesses have recorded a significant amount of goodwill and
other identifiable intangible assets, which may never be fully
realized.
Our businesses collectively had, as of December 31, 2006,
$288.0 million of goodwill and intangible assets or 55.5%
of our total assets. In connection with the acquisitions of
Aeroglide and Halo, we anticipate recording additional goodwill
and other intangible assets. In accordance with Financial
Accounting Standards Board Statement of Financial Accounting
Standards, or SFAS, No. 142, Goodwill and Other
Intangible Assets, we are required to evaluate
goodwill and other intangibles for impairment at least annually.
Impairment may result from, among other things, deterioration in
the performance of these businesses, adverse market conditions,
adverse changes in applicable laws or regulations, including
changes that restrict the activities of or affect the products
and services sold by these businesses, and a variety of other
factors. Depending on future circumstances, it is possible that
we may never realize the full value of these intangible assets.
The amount of any quantified impairment must be expensed
immediately as a charge to results of operations. Any future
determination of impairment of a material portion of goodwill or
other identifiable intangible assets could have a material
adverse effect on these businesses financial condition and
operating results, and could result in a default under our
revolving credit facility.
The
internal controls of our businesses have not yet been integrated
and we have only recently begun to examine the internal controls
that are in place for each business. As a result, we may fail to
comply with Section 404 of the Sarbanes-Oxley Act or our
auditors may report a material weakness in the effectiveness of
our internal control over financial reporting.
We are required under applicable law and regulations to
integrate the various systems of internal control over financial
reporting of our businesses. Beginning with our annual report
for the year ending December 31, 2007, pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002, which we
refer to as
25
Section 404, we will be required to include
managements assessment of the effectiveness of our
internal control over financial reporting as of the end of the
fiscal year. Additionally, our independent registered public
accounting firm will be required to issue a report on
managements assessment of our internal control over
financial reporting and a report on their evaluation of the
operating effectiveness of our internal control over financial
reporting.
We are evaluating our businesses existing internal
controls in light of the requirements of Section 404.
During the course of our ongoing evaluation and integration of
the internal controls of our businesses, we may identify areas
requiring improvement, and may have to design enhanced processes
and controls to address issues identified through this review.
Since our businesses were not subject to the requirements of
Section 404 before being acquired by us, the evaluation of
existing controls and the implementation of any additional
procedures, processes or controls may be costly. Our initial
compliance with Section 404 could result in significant
delays and costs and require us to divert substantial resources,
including management time and attention, from other activities
and hire additional accounting staff to address Section 404
requirements. In addition, under Section 404, we are
required to report all significant deficiencies to our audit
committee and independent auditor and all material weaknesses to
our audit committee and independent auditor and in our periodic
reports. We may not be able to successfully complete the
procedures, certification and attestation requirements of
Section 404 and we or our independent auditor may have to
report material weaknesses in connection with the presentation
of our financial statements.
If we fail to comply with the requirements of Section 404
or if our auditors report such a significant deficiency or
material weakness, the accuracy and timeliness of the filing of
our annual report may be materially adversely affected and could
cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on the
market price of the shares.
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 that cause 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
26
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
OEMs. 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 Aeroglide
Aeroglide
requires additional manufacturing capacity to maintain its
current level of growth; failure to add capacity or broaden its
outsourcing relationships could adversely affect
Aeroglides financial condition, business and results of
operations.
Aeroglides facilities are at or near capacity. Aeroglide
will need to either increase its manufacturing capacity or add
outsourced manufacturing capacity in order to materially grow
the business. Aeroglides failure to add capacity or
broaden its outsourcing relationships could adversely affect its
financial condition, business and results of operations.
Risks
Related to Anodyne
Anodyne
recently acquired its first three businesses and faces risks
associated with consolidation and integration.
Anodyne recently acquired its first three businesses and faces
risks associated with consolidation and integration. Anodyne was
formed in early 2006 to acquire SenTech Medical Systems, Inc.
which we refer to as SenTech, and AMF Support Surfaces, Inc.,
which we refer to as AMF. On October 5, 2006, Anodyne acquired
Anatomic Gobal, Inc., which we refer to as Anatomic. In addition
to SenTech, AMF, and Anatomic, Anodyne intends to acquire other
businesses in the medical mattress and support surface sector.
Anodynes operating results will be influenced by the
ability of Anodynes management to integrate these other
businesses.
Anodynes
business could be materially impacted by fluctuations in raw
material costs, such as foam, vinyl or fabric.
Anodynes results of operations could be materially
impacted by fluctuations in the cost of raw materials such as
foam, vinyl or fabric. In particular, fluctuations in the cost
of polyurethane foam could have a material effect on
profitability. Since August 2005, the cost of polyurethane foam
has increased significantly, in some cases by over 40%. There
can be no assurance that increases in the costs of raw materials
such as polyurethane foam can be passed along to customers. Any
inability to pass on increases in the costs of raw materials
could materially impact Anodynes profitability.
Certain
of Anodynes products are subject to regulation by the
FDA.
Certain of Anodynes mattress products are Class II
devices within Section 201(h) of the Federal Food, Drug and
Cosmetic Act (21 USC §321(h)), which we refer to as
the FDCA, and, as such, are subject to the requirements of the
FDCA and certain rules and regulations of the Food and Drug
Administration which we refer to as the FDA. Prior to our
acquisition of Anodyne, one of its subsidiaries
27
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 good manufacturing practice regulations
and certain record keeping requirements. Anodynes
subsidiary has undertaken corrective measures to address the
deficiencies and continues to fully cooperate with the FDA. The
FDA has the authority to inspect without notice, and to take any
disciplinary action that it sees fit, any one of which may have
a material adverse effect on Anodynes financial condition,
business or results of operations.
A
change in Medicare Reimbursement Guidelines may reduce demand
for Anodynes products.
Certain changes in Medicare Reimbursement Guidelines if and when
effective may reduce the amount of Medicare funds available for
purchasing certain products, which could in turn reduce demand
for medical support surfaces and have a material adverse effect
on Anodynes financial condition, business or results of
operations. We cannot predict when any such change in the
Guidelines may be effected, or the effect of such changes on
Anodynes business and operations.
Risks
Related to CBS Personnel
CBS
Personnels 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 CBS
Personnels 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. CBS Personnel 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. CBS
Personnels 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, CBS Personnel 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 CBS Personnel 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.
Moreover, evolving technological innovations may require CBS
Personnel to seek better educated and trained workers, who may
not be available in sufficient numbers.
Customer
relocation of positions filled by CBS Personnel may materially
adversely affect CBS Personnels 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 CBS Personnels customers
relocate positions filled by CBS Personnel, this would have a
material adverse effect on the financial condition, business and
results of operations of CBS Personnel.
CBS
Personnel assumes the obligation to make wage, tax and
regulatory payments for its employees, and as a result, it is
exposed to client credit risks.
CBS Personnel 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 CBS Personnel to credit risks
of its clients, primarily relating to uncollateralized accounts
receivables. If CBS Personnel fails to successfully manage its
credit risk, its financial condition, business and results of
operations may be materially adversely affected.
28
CBS
Personnel 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. CBS
Personnels 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. CBS Personnel 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 managements attention
from the operations of CBS Personnels business.
Furthermore, while CBS Personnel 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 CBS Personnels financial condition,
business and results of operations.
CBS
Personnels workers compensation loss reserves may be
inadequate to cover its ultimate liability for workers
compensation costs.
CBS Personnel 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, CBS Personnel would have to increase its reserves
and incur charges to its earnings that could be material.
Risks
Related to Halo
Increases
in the portion of end customers buying directly from
manufacturers could have a material adverse effect on the
business of Halo.
The promotional products industry supply chain is comprised of
multiple levels. As a distributor, Halo does not manufacture or
decorate the promotional products it sells. Though management
believes distributors play a valuable role in the industry,
increases in the portion of end customers buying directly from
manufacturers could have a material adverse effect on the
financial condition, business and results of operations 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. Halos 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.
29
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 Halos results of
operations.
Halo often relies on many of its suppliers to ship directly to
its end customers. Delays in the shipment of products or supply
shortages in promotional products in high demand could affect
Halos reputation and standing with its end customers and
adversely affect Halos results of operations.
Risks
Related to Silvue
Silvue
derives a significant portion of its revenue from the eyewear
industry. Any economic downturn in this market or increased
regulations by the FDA, would materially adversely affect its
operating results and financial condition.
Silvues management estimates that in 2006 approximately
88% of its net sales were from the premium eyewear industry.
Because Silvues customers are concentrated in the eyewear
industry, the economic factors impacting this industry also
impact its operations and revenues. Any downturn in this market
would materially adversely affect its operating results and
financial condition. Further, Silvues coating technology
is used primarily on mid and high value lenses. A decline in the
ophthalmic and sunglass lens industry in general, or a change in
consumers preferences from mid and high value lenses to
low value lenses within the industry, may have a material
adverse effect on its financial condition, business and results
of operations.
Silvues
technology is compatible with certain substrates and processes
and competes with a number of products currently sold on the
market. A change in the substrate, process or competitive
landscape could have a material adverse affect on its financial
condition, business and results of operations.
Silvue provides material for the coating of polycarbonate,
acrylic, glass, metals and other surfaces. Its business is
dependent upon the continued use of these substrates and the
need for its products to be applied to these substrates. In
addition, Silvues products are compatible with certain
application techniques. New application techniques designed to
improve performance and decrease costs are being developed that
may be incompatible with Silvues coating technologies.
Further, Silvue competes with a number of large and small
companies in the research, development, and production of
coating systems. A competitor may develop a coating system that
is technologically superior and render Silvues products
less competitive. Any of these conditions may have a material
adverse effect on its financial condition, business and results
of operations.
Risks
Related to this Offering
We
have broad discretion in using the net proceeds of this
offering. Our failure to effectively use these proceeds could
adversely affect our ability to earn profits.
We will receive net proceeds in this offering of approximately
$ . We intend to use the net
proceeds to repay existing indebtedness and for general
corporate purposes, including the acquisition of other
businesses. If we fail to identify desirable acquisition
targets, or fail to effectively consummate such acquisitions, or
ability to earn profits could be adversely affected.
Our
shares are thinly traded and you may not be able to sell the
securities at all or when you want to do so.
Our shares currently are quoted on the NASDAQ Global Select
Market and currently are thinly traded. Since the closing of the
IPO, the weekly trading volume for our shares has been as low
as shares
per week and as high
as shares
per week as reported by NASDAQ. Our average daily trading volume
was 51,054 for the quarter ended March 31, 2007 as reported
by NASDAQ. Because of the limited public market for our shares,
you may be unable to sell our shares when you want to do so.
30
Future
sales of shares may cause the market price of our shares to
decline.
We cannot predict what effect, if any, future sales of our
shares, or the availability of shares for future sale, will have
on the market price of our shares. Sales of substantial amounts
of our shares in the public market following this offering, or
the perception that such sales could occur, could materially
adversely affect the market price of our shares and may make it
more difficult for you to sell your shares at a time and price
which you deem appropriate. A decline below the offering price,
in the future, is possible. After the consummation of this
offering and the separate private placement transaction, there
will
be shares
of the trust issued and outstanding
(
shares if the underwriters exercise their over-allotment option
in full).
The shares
sold in this offering
(
shares if the underwriters exercise their over-allotment option
in full) will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended, or
the Securities Act, by persons other than our affiliates within
the meaning of Rule 144 under the Securities Act. In
addition, under the terms of the registration rights agreements
with CGI and Pharos, we will be required to file a shelf
registration statement under the Securities Act relating to the
resale of all shares owned by such holders (subject to the
restrictions contained in those agreements) as soon as
reasonably possible following May 16, 2007, the one year
anniversary of our IPO. See Certain Relationships and
Related Party Transaction Contractual Relationships
with Related Parties Registration Rights
Agreements.
We, CGI, Pharos I LLC, which we refer to as Pharos, the
employees of our manager and our officers and directors have
agreed that, with limited exceptions, we and they will not
directly or indirectly, without the prior written consent of
Citigroup Global Markets Inc., on behalf of the underwriters,
offer to sell, sell or otherwise dispose of any shares for a
period of 90 days after the date of this prospectus.
We may
issue additional debt and equity securities which are senior to
our shares as to distributions and in liquidation, which could
materially adversely affect the market price of our shares and
result in dilution to our shareholders.
In the future, we may attempt to increase our capital resources
by entering into additional debt or debt-like financing that is
secured by all or up to all of our assets, or issuing debt or
equity securities, which could include issuances of commercial
paper, medium-term notes, senior notes, subordinated notes or
equity securities, including preferred securities. Specifically,
we do intend to issue our shares as consideration for future
acquisitions. In the event of our liquidation, our lenders and
holders of our debt securities would receive a distribution of
our available assets before distributions to our shareholders.
Any preferred securities, if issued, may have a preference with
respect to distributions and upon liquidation, which could
further limit our ability to make distributions to our
shareholders. Because our decision to incur debt and issue
securities in our future offerings will depend on market
conditions and other factors beyond our control, we cannot
predict or estimate the amount, timing or nature of our future
offerings and debt financing. Further, market conditions could
require us to accept less favorable terms for the issuance of
our securities in the future. Thus, you will bear the risk of
our future offerings reducing the value of your shares and
diluting your interest in us. In addition, we can change our
leverage strategy from time to time without shareholder
approval, which could materially adversely affect the market
share price of our shares.
Our
earnings and cash distributions may affect the market price of
our shares.
Generally, the market price of our shares may be based, in part,
on the markets perception of our growth potential and our
current and potential future cash distributions, whether from
operations, sales, acquisitions or refinancings, and on the
value of our businesses. For that reason, our shares may trade
at prices that are higher or lower than our net asset value per
share. Should we retain operating cash flow for investment
purposes or working capital reserves instead of distributing the
cash flows to our shareholders, the retained funds, while
increasing the value of our underlying assets, may materially
adversely affect the market price of our shares. Our failure to
meet market expectations with respect to earnings and cash
distributions could materially adversely affect the market price
of our shares.
31
If the market price of our shares declines, you may be unable to
resell your shares at or above the public offering price. We
cannot assure you that the market price of our shares will not
fluctuate or decline significantly, including a decline below
the public offering price, in the future.
The
market price, trading volume and marketability of our shares
may, from time to time, be significantly affected by numerous
factors beyond our control, which may materially adversely
affect the market price of your shares and our ability to raise
capital through future equity financings.
The market price and trading volume of our shares may fluctuate
significantly. Many factors that are beyond our control may
significantly affect the market price and marketability of our
shares and may materially adversely affect our ability to raise
capital through equity financings. These factors include: price
and volume fluctuations in the stock markets generally which
create highly variable and unpredictable pricing of equity
securities; significant volatility in the market price and
trading volume of securities of companies in the sectors in
which our businesses operate, which may not be related to the
operating performance of these companies and which may not
reflect the performance of our businesses; changes and
variations in our earnings and cash flows; any shortfall in
revenue or net income or any increase in losses from levels
expected by securities analysts; changes in regulation or tax
law; operating performance of companies comparable to us;
general economic trends and other external factors including
inflation, interest rates, and costs and availability of raw
materials, fuel and transportation; and loss of a major funding
source.
All of our shares sold in this offering will be freely
transferable by persons other than our affiliates and those
persons subject to
lock-up
agreements, without restriction or further registration under
the Securities Act.
FORWARD-LOOKING
STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, and elsewhere 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:
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|
|
our ability to successfully operate our current businesses on a
combined basis, and to effectively integrate and improve any
future acquisitions;
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|
|
our ability to remove our manager and our managers right
to resign;
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|
|
|
our trust and organizational structure, which may limit our
ability to meet our dividend and distribution policy;
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|
|
our ability to service and comply with the terms of our
indebtedness;
|
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|
|
our cash flow available for distribution after the closing of
this offering and our ability to make distributions in the
future to our shareholders;
|
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|
|
our ability to pay the management fee, profit allocation and put
price when due;
|
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|
|
our ability to make and finance future acquisitions;
|
|
|
|
our ability to implement our acquisition and management
strategies;
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|
|
the regulatory environment in which our businesses operate;
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|
|
|
trends in the industries in which our businesses operate;
|
32
|
|
|
|
|
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;
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|
|
environmental risks affecting the business or operations of our
current businesses;
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|
|
|
our and our managers ability to retain or replace
qualified employees of our current businesses and our manager;
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|
costs and effects of legal and administrative proceedings,
settlements, investigations and claims; and
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|
extraordinary or force majeure events affecting the business or
operations of our current 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 and elsewhere in this
prospectus. 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
prospectus may not occur. These forward-looking statements are
made as of the date of this prospectus. We undertake no
obligation to publicly update or revise any forward-looking
statements after the completion of this offering, whether as a
result of new information, future events or otherwise, except as
required by law.
33
USE OF
PROCEEDS
We estimate that our net proceeds from the sale
of
shares in this offering will be approximately
$ million (or approximately
$ million if the
underwriters overallotment option is exercised in full),
based on the public offering price of
$ per share and after deducting
underwriting discounts and commissions of approximately
$ million (or approximately
$ million if the
underwriters overallotment option is exercised in full),
but without giving effect to the payment of public offering
costs of approximately $ million.
In addition, CGI has agreed to purchase in a separate private
placement transaction to close in conjunction with the closing
of this offering a number of shares in the trust having an
aggregate purchase price of approximately $30 million at a per
share price equal to the public offering price. We intend to use
approximately $ of the net
proceeds from this offering and from the separate private
placement transaction to repay borrowings under our revolving
credit facility and any remaining amounts for general corporate
purposes, including to fund acquisitions, if and when identified
and consummated. Our revolving credit facility has been used to
provide funding for our acquisitions and loans to our
businesses. Our revolving credit facility permits borrowings up
to $255 million with an option to increase the facility by
$45 million. 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 companys 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 companys
total debt to EBITDA ratio. As
of ,
2007, there was an aggregate of $
million of base rate loans and $
of LIBOR loans outstanding under the revolving credit facility.
As
of ,
2007 the interest rate for base rate loans
was % and the interest rate for LIBOR
loans was %. Outstanding indebtedness
under the revolving credit facility will mature on
November 21, 2011. 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.
PRICE
RANGE OF SHARES
Our shares trade on the NASDAQ Global Select Market under the
symbol CODI. On April , 2007, the last
reported sale price of our shares on the NASDAQ Global Select
Market was $ per share. The
following table sets forth, for the periods indicated, the high
and low sales prices of the shares as reported on the NASDAQ
Global Select Market.
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|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006:
|
|
|
|
|
|
|
|
|
Second Quarter (from May 16,
2006)
|
|
$
|
15.10
|
|
|
$
|
14.27
|
|
Third Quarter
|
|
|
15.36
|
|
|
|
13.45
|
|
Fourth Quarter
|
|
|
17.67
|
|
|
|
15.70
|
|
2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
18.46
|
|
|
$
|
16.65
|
|
Second Quarter
(through ,
2007)
|
|
$
|
|
|
|
$
|
|
|
As of March 31, 2007 we had 20,450,000 of our shares
outstanding that were held by fewer than ten holders of record;
however, we believe the number of beneficial owners of our
shares is approximately 5,500.
34
DIVIDEND
AND DISTRIBUTION POLICY
The companys board of directors intends to declare and pay
regular quarterly cash distributions on all outstanding shares.
On July 18, 2006, the trust paid a pro rata distribution of
$0.1327 per share to holders of record on July 11, 2006 for
the quarter ended June 30, 2006. On October 19, 2006,
the trust paid a distribution of $0.2625 to holders of record as
of October 13, 2006 for the quarter ended
September 30, 2006. On January 24, 2007, the trust
paid a distribution of $0.30 to holders of record as of
January 18, 2007 for the quarter ended December 31,
2006. The companys board of directors intends to set each
distribution on the basis of the current results of operations
of our businesses and other resources available to the company,
including the third party credit facility, and the desire to
provide sustainable levels of distributions to our shareholders.
Our distribution policy is based on the predictable and stable
cash flows of our businesses and our intention to provide
sustainable levels of distributions to our shareholders while
reinvesting a portion of our cash flows in our businesses or in
the acquisition of new businesses. If we successfully implement
our strategy, we expect to maintain and increase the level of
our distributions to shareholders in the future.
The declaration and payment of any future distribution will be
subject to the approval of a majority of the companys
board of directors. The board of directors will at all times
include a majority of independent directors. The companys
board of directors will take into account such matters as
general business conditions, our financial condition, results of
operations, capital requirements and any contractual, legal and
regulatory restrictions on the payment of distributions by us to
our shareholders or by our subsidiaries to us, and any other
factors that the board of directors deems relevant. However,
even in the event that the companys board of directors
were to decide to declare and pay distributions, our ability to
pay such distributions may be adversely impacted due to unknown
liabilities, government regulations, financial covenants of the
debt of the company, funds needed for acquisitions and to
satisfy short- and long-term working capital needs of our
businesses, or if our businesses do not generate sufficient
earnings and cash flow to support the payment of such
distributions. In particular, we may incur debt in the future to
acquire new businesses, which debt will have substantial payment
obligations, which must be satisfied before we can make
distributions. These factors could affect our ability to
continue to make distributions.
We may use cash flow from our businesses, the capital resources
of the company, including borrowings under the companys
third party credit facility, or a reduction in equity to pay a
distribution. See the section entitled Material U.S.
Federal Income Tax Considerations for more information
about the tax treatment of distributions to our shareholders.
Restrictions
on Distribution Payments
We are dependent upon the ability of our businesses to generate
earnings and cash flow and to make distributions to us in the
form of interest and principal payments on indebtedness and
distributions on equity to enable us to, first, satisfy our
financial obligations, including payments under our revolving
credit facility, the management fee, profit allocation and put
price, and, second, make distributions to our shareholders.
There is no guarantee that we will continue to make quarterly
distributions. Our ability to make quarterly distributions may
be subject to certain restrictions, including:
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|
|
the operating results of our businesses which are impacted by
factors outside of our control including competition, inflation
and general economic conditions;
|
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|
|
the ability of our businesses to make distributions to us, which
may be subject to limitations under laws of the jurisdictions in
which they are incorporated or organized;
|
|
|
|
insufficient cash to pay distributions due to increases in our
general and administrative expenses, including the quarterly
management fee we pay our manager, principal and interest
payments on our outstanding debt, tax expenses or working
capital requirements;
|
|
|
|
the obligation to pay our manager a profit allocation upon the
occurrence of a trigger event;
|
|
|
|
the obligation to pay our manager the put price pursuant to the
supplemental put agreement;
|
35
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|
|
|
|
the companys board of directors election to keep a
portion of the operating cash flow in the businesses or to use
such funds for the acquisition of new businesses;
|
|
|
|
restrictions on distributions under our revolving credit
facility which contains financial covenants that we will have to
satisfy in order to make quarterly or annual distributions;
|
|
|
|
any dividends or distributions paid by our businesses pro rata
to the minority shareholders of our businesses, which portion
will not be available to us for any purpose, including for the
purpose of making distributions to our shareholders;
|
|
|
|
possible future issuances of debt or debt-like financing
arrangements that are secured by all or substantially all of our
assets, or issuing debt or equity securities, which could
include issuances of commercial paper, medium-term notes, senior
notes, subordinated notes or preferred securities, which
obligations will have priority over distributions on the shares;
and
|
|
|
|
in the future, the company may issue preferred securities and
holders of such preferred securities may have a preference with
respect to distributions, which could limit our ability to make
distributions to our shareholders.
|
As a consequence of these various restrictions, we may not be
able to declare, or may have to delay or cancel payment of,
distributions to our shareholders.
Because the companys board of directors intends to
continue to declare and pay regular quarterly cash distributions
on all outstanding shares, our growth may not be as fast as
businesses that reinvest their available cash to expand ongoing
operations. We expect that we will rely upon external financing
sources, including issuances of debt or debt-like financing
arrangements and the issuance of debt and equity securities, to
fund our acquisitions and expansion of capital expenditures. As
a result, to the extent we are unable to finance growth
externally, our decision to declare and pay regular quarterly
distributions will significantly impair our ability to grow.
Our decision to incur debt and issue securities in future
offerings will depend on market conditions and other factors
beyond our control. Therefore, we cannot predict or estimate the
amount, timing or nature of our future offerings and debt
financings. Likewise, holders of our shares may be diluted
pursuant to additional equity issuances.
36
PRO FORMA
CAPITALIZATION
The following table sets forth our unaudited pro forma
capitalization, assuming no exercise of the underwriters
overallotment option, at the public offering price of
$ per share of the trust and the
application of the estimated net proceeds of such sale (after
deducting underwriting discounts and commission and our
estimated offering expenses) as well as the proceeds from the
separate private placement transaction. As Adjusted
reflects the repayment of outstanding debt from the proceeds of
the sale of Crosman, cash used and debt incurred for the
acquisitions of Aeroglide and Halo and the application of the
net proceeds of this offering as further described in the
Pro Forma Condensed Financial Statements included
within this prospectus. This table should be read in conjunction
with Use of Proceeds, Pro Forma Condensed
Financial Statements and our consolidated financial
statements included elsewhere in this prospectus.
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|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
($ in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
7,006
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$
|
87,604
|
|
|
$
|
|
|
Long-term debt, excluding current
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
87,604
|
|
|
$
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Trust shares, no par value;
500,000,000
authorized; shares
issued and outstanding as adjusted for the offering(1)
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
255,711
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
343,315
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Each trust share representing one undivided beneficial interest
in the trust property. |
37
PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma condensed combined balance
sheet as of December 31, 2006, gives effect to the
following transactions, as if the following transactions had
been completed as of December 31, 2006:
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|
|
|
|
the offering and the application of proceeds from this offering
and from the separate private placement transaction as further
described in the section entitled Use of Proceeds;
|
|
|
|
the sale of Crosman on January 5, 2007 and the application
of the proceeds from this sale to retire third party debt and to
provide partial funding for the acquisition of Aeroglide and
Halo; and
|
|
|
|
the acquisition of approximately 89.0% of Aeroglide and
approximately 73.6% of Halo.
|
The purchase price for these acquisitions are subject to
adjustment. The actual amount of such adjustments, which we do
not expect to be material, will depend upon the actual working
capital of Aeroglide and Halo as of February 28, 2007.
The following unaudited pro forma condensed combined statements
of operations for the year ended December 31, 2006, gives
effect to this offering, the separate private placement
transaction and the acquisition of Aeroglide and Halo as if they
had occurred at the beginning of the fiscal period presented.
The as reported financial information in the
unaudited pro forma condensed combined balance sheet at
December 31, 2006, and for the year ended December 31,
2006, for Aeroglide and Halo are derived from the audited
financial statements for the year ended December 31, 2006
of each of the businesses, which are included elsewhere in this
prospectus. The as reported financial information
for the trust at December 31, 2006 and for the year ended
December 31, 2006, is derived from the audited financial
statements of the trust as of December 31, 2006 and for the
year ended December 31, 2006 and is included in this
prospectus.
The following unaudited pro forma condensed combined financial
statements, or the pro forma financial statements, have been
prepared assuming that our acquisition of the Aeroglide and Halo
businesses will be accounted for under the purchase method of
accounting. Under the purchase method of accounting, the assets
acquired and the liabilities assumed will be recorded at their
respective fair value at the date of acquisition. The total
purchase price has been allocated to the assets acquired and
liabilities assumed based on estimates of their respective fair
values, which are subject to revision if the finalization of the
respective fair values results in a material difference to the
preliminary estimate used.
The unaudited pro forma condensed combined statement of
operations includes the results of operations for Aeroglide and
Halo as if they were purchased on January 1, 2006 and the
actual historical results of operations of our other businesses
as of the date of acquisition, which was May 16, 2006 for
our initial businesses and August 1, 2006 for Anodyne. As
such these pro forma financial statements are not necessarily
indicative of operating results that would have been achieved
had the transactions described above been completed at the
beginning of the period presented and should not be construed as
indicative of future operating results.
You should read these unaudited pro forma condensed financial
statements in conjunction with the financial statements and
accompanying footnotes of Aeroglide and Halo included in this
prospectus and the consolidated financial statements for the
trust and the company, including the notes thereto.
38
Compass
Diversified Trust
Condensed
Combined Pro Forma Balance Sheet
at
December 31, 2006
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Compass
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
Diversified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compass
|
|
|
|
Trust
|
|
|
|
|
|
Aeroglide
|
|
|
Halo
|
|
|
Pro Forma
|
|
|
Diversified
|
|
|
|
(as reported)
|
|
|
Offering*
|
|
|
(as reported)
|
|
|
(as reported)
|
|
|
Adjustments
|
|
|
Trust
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,006
|
|
|
$
|
157,000
|
|
|
$
|
4,539
|
|
|
$
|
339
|
|
|
$
|
(83,476
|
)(1)
|
|
$
|
85,408
|
|
Accounts receivable, net
|
|
|
74,899
|
|
|
|
|
|
|
|
11,340
|
|
|
|
22,769
|
|
|
|
|
|
|
|
109,008
|
|
Inventories
|
|
|
4,756
|
|
|
|
|
|
|
|
2,380
|
|
|
|
3,127
|
|
|
|
|
|
|
|
10,263
|
|
Prepaid expenses and other current
assets
|
|
|
7,059
|
|
|
|
|
|
|
|
324
|
|
|
|
2,838
|
|
|
|
|
|
|
|
10,221
|
|
Current assets of discontinued
operations
|
|
|
46,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,636
|
)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
140,356
|
|
|
|
157,000
|
|
|
|
18,583
|
|
|
|
29,073
|
|
|
|
(130,112
|
)
|
|
|
214,900
|
|
Property and equipment, net
|
|
|
10,858
|
|
|
|
|
|
|
|
4,443
|
|
|
|
959
|
|
|
|
3,471
|
(3)
|
|
|
19,731
|
|
Goodwill
|
|
|
159,151
|
|
|
|
|
|
|
|
7,812
|
|
|
|
7,388
|
|
|
|
44,137
|
(4)
|
|
|
218,488
|
|
Intangible assets, net
|
|
|
128,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,720
|
(5)
|
|
|
186,610
|
|
Deferred debt issuance costs
|
|
|
5,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,190
|
|
Other non-current assets
|
|
|
15,894
|
|
|
|
|
|
|
|
1,478
|
|
|
|
1,220
|
|
|
|
(2,698
|
)(6)
|
|
|
15,894
|
|
Assets of discontinued operations
|
|
|
65,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,258
|
)(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
525,597
|
|
|
$
|
157,000
|
|
|
$
|
32,316
|
|
|
$
|
38,640
|
|
|
$
|
(92,740
|
)
|
|
$
|
660,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
52,900
|
|
|
$
|
|
|
|
$
|
17,754
|
|
|
$
|
18,204
|
|
|
$
|
|
|
|
$
|
88,858
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516
|
|
|
|
(516
|
)(8)
|
|
|
|
|
Due to related party
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469
|
|
Current portion of debt
|
|
|
87,604
|
|
|
|
|
|
|
|
1,324
|
|
|
|
1,096
|
|
|
|
(87,420
|
)(9)
|
|
|
2,604
|
|
Current portion of supplemental put
obligation
|
|
|
7,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,880
|
|
Current liabilities of discontinued
operations
|
|
|
14,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,019
|
)(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
162,872
|
|
|
|
|
|
|
|
19,078
|
|
|
|
19,816
|
|
|
|
(101,955
|
)
|
|
|
99,811
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
4,058
|
|
|
|
8,205
|
|
|
|
(11,761
|
)(11)
|
|
|
502
|
|
Supplemental put obligation
|
|
|
14,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,576
|
|
Long-term deferred income taxes
|
|
|
41,337
|
|
|
|
|
|
|
|
71
|
|
|
|
170
|
|
|
|
13,586
|
(12)
|
|
|
55,164
|
|
Non-current liabilities of
discontinued operations
|
|
|
6,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,634
|
)(13)
|
|
|
|
|
Other non-current liabilities
|
|
|
17,336
|
|
|
|
|
|
|
|
1,703
|
|
|
|
|
|
|
|
(1,703
|
)(14)
|
|
|
17,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
242,755
|
|
|
|
|
|
|
|
24,910
|
|
|
|
28,191
|
|
|
|
(108,467
|
)
|
|
|
187,389
|
|
Minority interest
|
|
|
27,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,321
|
)(15)
|
|
|
24,810
|
|
Total stockholders equity
|
|
|
255,711
|
|
|
|
157,000
|
|
|
|
7,406
|
|
|
|
10,449
|
|
|
|
18,048(16
|
)
|
|
|
448,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
525,597
|
|
|
$
|
157,000
|
|
|
$
|
32,316
|
|
|
$
|
38,640
|
|
|
$
|
(92,740
|
)
|
|
$
|
660,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Reflects the issuance of shares and the net proceeds from this
offering (after deducting underwriting discounts and commissions
of $6,800 and estimated offering expenses of $2,200) and the
proceeds from the separate private placement transaction. |
39
Compass
Diversified Trust
Condensed
Combined Pro Forma Statement of Operations
for the
year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Compass
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
Diversified
|
|
|
|
|
|
|
|
|
|
|
|
Compass
|
|
|
|
Trust
|
|
|
Aeroglide
|
|
|
Halo
|
|
|
Pro Forma
|
|
|
Diversified
|
|
|
|
(as reported)
|
|
|
(as reported)
|
|
|
(as reported)
|
|
|
Adjustments
|
|
|
Trust
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share data)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
410,873
|
|
|
$
|
48,086
|
|
|
$
|
115,646
|
|
|
$
|
|
|
|
$
|
574,605
|
|
Cost of sales
|
|
|
311,641
|
|
|
|
27,699
|
|
|
|
71,210
|
|
|
|
370
|
(2)
|
|
|
410,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
99,232
|
|
|
|
20,387
|
|
|
|
44,436
|
|
|
|
(370
|
)
|
|
|
163,685
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staffing expense
|
|
|
34,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,345
|
|
Selling, general and
administrative expense
|
|
|
36,732
|
|
|
|
17,334
|
|
|
|
38,321
|
|
|
|
174
|
(2)
|
|
|
92,561
|
|
Supplemental put expense
|
|
|
22,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,456
|
|
Fees to manager
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
2,364
|
(5)
|
|
|
6,740
|
|
Research and development expense
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
Amortization expense
|
|
|
6,774
|
|
|
|
|
|
|
|
|
|
|
|
7,129
|
(1)
|
|
|
13,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
(7,257
|
)
|
|
|
3,053
|
|
|
|
6,115
|
|
|
|
(10,037
|
)
|
|
|
(8,126
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
807
|
|
Interest expense
|
|
|
(6,130
|
)
|
|
|
(594
|
)
|
|
|
(797
|
)
|
|
|
3,891
|
(3)
|
|
|
(3,630
|
)
|
Amortization of debt issuance costs
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(779
|
)
|
Loss on debt extinguishment
|
|
|
(8,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,275
|
)
|
Other income (expense), net
|
|
|
541
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before provision for income taxes and minority
interest
|
|
|
(21,093
|
)
|
|
|
2,484
|
|
|
|
5,318
|
|
|
|
(6,146
|
)
|
|
|
(19,437
|
)
|
Provision for income taxes
|
|
|
5,298
|
|
|
|
851
|
|
|
|
2,203
|
|
|
|
(2,387
|
)(4)
|
|
|
5,965
|
|
Minority interest
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
430
|
(6)
|
|
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
(27,636
|
)
|
|
$
|
1,633
|
|
|
$
|
3,115
|
|
|
$
|
(4,189
|
)
|
|
$
|
(27,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
per share
|
|
$
|
(2.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding
|
|
|
12,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Notes to
Pro Forma Condensed Combined Financial Statements
(Unaudited)
This information in Note 1 provides all of the pro forma
adjustments from each line item in the pro forma Condensed
Combined Financial Statements. Note 2 describes how the
adjustments were derived or calculated. Unless otherwise noted,
all amounts are in thousands of dollars ($000).
|
|
Note 1.
|
Pro Forma
Adjustments
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
1.
|
|
|
Cash and cash
equivalents
|
|
|
|
|
|
|
|
|
Net proceeds from the sale of
Crosman after partial application of proceeds to repay
borrowings under the revolving credit facility
|
|
$
|
34,722
|
(a)
|
|
|
|
|
Revolving credit borrowing to
partially fund acquisition of Aeroglide and Halo
|
|
|
94,500
|
(b)
|
|
|
|
|
Use of cash to fund acquisitions
of Aeroglide and Halo
|
|
|
(118,198
|
)(c)
|
|
|
|
|
Partial use of the net proceeds
from this offering and from the separate private placement
transaction to repay outstanding borrowings under the revolving
credit facility
|
|
|
(94,500
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(83,476
|
)
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
|
Current assets of discontinued
operations
|
|
|
|
|
|
|
|
|
Sale of Crosman
|
|
$
|
(46,636
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
|
Property and equipment,
net
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
2,553
|
(e)
|
|
|
|
|
Halo
|
|
|
918
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,471
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
20,792
|
(e)
|
|
|
|
|
Halo
|
|
|
23,345
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,137
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
|
|
Intangible assets,
net
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
22,250
|
(e)
|
|
|
|
|
Halo
|
|
|
35,470
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,720
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
|
|
Other non-current
assets
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
(1,478
|
)(e)
|
|
|
|
|
Halo
|
|
|
(1,220
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,698
|
)
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
|
Assets of discontinued
operations
|
|
|
|
|
|
|
|
|
Sale of Crosman
|
|
$
|
(65,258
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
8.
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
Halo
|
|
$
|
(516
|
)(f)
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
9.
|
|
|
Current portion of
debt
|
|
|
|
|
|
|
|
|
Sale of Crosman
|
|
$
|
(85,000
|
)(a)
|
|
|
|
|
Aeroglide
|
|
|
(1,324
|
)(e)
|
|
|
|
|
Halo
|
|
|
(1,096
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(87,420
|
)
|
|
|
|
|
|
|
|
|
|
|
10.
|
|
|
Current liabilities of
discontinued operations
|
|
|
|
|
|
|
|
|
Sale of Crosman
|
|
$
|
(14,019
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
11.
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Compass Diversified Trust
|
|
$
|
94,500
|
(b)
|
|
|
|
|
Compass Diversified Trust
|
|
|
(94,500
|
)(d)
|
|
|
|
|
Aeroglide
|
|
|
(4,058
|
)(e)
|
|
|
|
|
Halo
|
|
|
(7,703
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,761
|
)
|
|
|
|
|
|
|
|
|
|
|
12.
|
|
|
Long-term deferred income
taxes
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
|
(71
|
)(e)
|
|
|
|
|
Halo
|
|
|
13,657
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,586
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
|
|
Non-current liabilities of
discontinued operations
|
|
|
|
|
|
|
|
|
Crosman sale
|
|
$
|
(6,634
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
14.
|
|
|
Other non-current
liabilities
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
(1,703
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
15.
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
Sale of Crosman
|
|
$
|
(7,422
|
)(a)
|
|
|
|
|
Aeroglide
|
|
|
2,350
|
(e)
|
|
|
|
|
Halo
|
|
|
2,751
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,321
|
)
|
|
|
|
|
|
|
|
|
|
|
16.
|
|
|
Total stockholders
equity
|
|
|
|
|
|
|
|
|
Sale of Crosman
|
|
$
|
35,903
|
(a)
|
|
|
|
|
Aeroglide
|
|
|
(7,406
|
)(e)
|
|
|
|
|
Halo
|
|
|
(10,449
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,048
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
|
1.
|
|
|
Amortization expense
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
5,006
|
(a)(1)
|
|
|
|
|
Halo
|
|
|
2,123
|
(b)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,129
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
|
2.
|
|
|
Depreciation expense
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
370
|
(a)(3)
|
|
|
|
|
Halo
|
|
|
174
|
(b)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
544
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
594
|
(a)(2)
|
|
|
|
|
Halo
|
|
|
797
|
(b)(2)
|
|
|
|
|
Compass Diversified Trust
|
|
|
2,500
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,891
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
|
Provision for income
taxes
|
|
|
|
|
|
|
|
|
Aeroglide
|
|
$
|
(1,817
|
)(a)(4)
|
|
|
|
|
Halo
|
|
|
(570
|
)(b)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,387
|
)
|
|
|
|
|
|
|
|
|
|
|
5.
|
|
|
Fees to manager
|
|
|
|
|
|
|
|
|
Compass Diversified Trust
|
|
$
|
2,364
|
(c)
|
|
|
|
|
|
|
|
|
|
|
6.
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
Compass Diversified Trust
|
|
$
|
430
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
Note 2.
|
Pro Forma
Adjustments by Business
|
As a further illustration, we have grouped the pro forma
adjustments detailed in Note 1 to the Pro Forma Condensed
Financial Statements by each business to show the combine effect
of the pro forma adjustments on each business.
Balance
Sheet
a. Sale of Crosman
Reflects the sale of Crosman on January 5, 2007 whereby the
company received proceeds of $119,722 and applied $85,000 of
such proceeds from the sale to repay revolving credit facility
borrowings outstanding on the date of the sale. Partial funding
for the acquisitions of Aeroglide and Halo were provided by the
cash remaining after the repayment of the $85.0 million of
revolving credit facility borrowings. The sale resulted in a
gain of $35,903 that will be recorded in fiscal 2007.
|
|
|
|
|
Cash
|
|
$
|
34,722
|
|
Current assets of discontinued
operations
|
|
|
(46,636
|
)
|
Assets of discontinued operations
|
|
|
(65,258
|
)
|
Current portion of debt
|
|
|
85,000
|
|
Current liabilities of
discontinued operations
|
|
|
14,019
|
|
Non-current liabilities of
discontinued operations
|
|
|
6,634
|
|
Minority interest
|
|
|
7,422
|
|
Equity
|
|
|
(35,903
|
)
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
43
b. Reflects borrowings from the revolving credit facility
to partially fund the Aeroglide and Halo acquisitions:
|
|
|
|
|
Cash
|
|
$
|
94,500
|
|
Long-term debt
|
|
|
(94,500
|
)
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
c. Reflect the use of cash for the acquisitions of
Aeroglide and Halo:
|
|
|
|
|
Aeroglide see note e
|
|
$
|
(56,329
|
)
|
Halo see note f
|
|
|
(61,869
|
)
|
|
|
|
|
|
|
|
$
|
(118,198
|
)
|
|
|
|
|
|
d. Reflects the partial use of the net proceeds from the
offering to repay revolving credit facility borrowing incurred
to fund the acquisitions of Aeroglide and Halo:
|
|
|
|
|
Long-term debt
|
|
$
|
94,500
|
|
Cash
|
|
|
(94,500
|
)
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
e. Aeroglide Acquisition
The following information represents the pro forma adjustments
made by us in Note 1 to reflect our acquisition of a 89.0%
equity interest in and loans to Aeroglide for a total cash
investment of approximately $56.3 million. This investment
of $56.3 million was assigned to assets of
$76.4 million, current liabilities of $17.8 million
consisting of the historical carrying values for accounts
payable and accrued expenses and $2.3 million to minority
interest. The asset allocation represents $18.6 million of
current assets valued at their historical carrying values,
property and equipment of $7.0 million valued through a
preliminary asset appraisal, $22.2 million of intangible
and other assets and $28.6 million of goodwill representing
the excess of the purchase price over identifiable assets. The
preliminary intangible asset values consist principally of
customer relationships valued at $13.0 million, trade names
valued at $3.4 million order backlog valued at
$3.4 million, process know-how valued at $2.0 million
and non-compete agreements valued at $0.4 million.
The customer relationships were valued at $13.0 million
using an excess earnings methodology, in which an asset is
valuable to the extent that the asset enables its owner to earn
a return in excess of the required returns on and of the other
assets utilized in the business. Customer relationships were
analyzed separately for each of the capital equipment and
aftermarket and other segments of the business, as described in
the following two paragraphs.
Capital equipment customer relationships were valued at
$5.0 million. The key assumptions in this analysis were an
economic margin of approximately 9.0% (on average) of sales
attributable to Aeroglides capital equipment customer
relationships, an estimate that sales to these capital equipment
customers would be $29.6 million in 2008 prior to factoring
in customer attrition, an attrition rate (reflecting the rate at
which Aeroglides capital equipment customer relationships
are lost) of 20% per annum, a risk-adjusted discount rate
of 19%, and a remaining useful life of 10 years.
Aftermarket and other customer relationships were valued at
$8.0 million. The key assumptions in this analysis were an
economic margin of approximately 17.5% (on average) of sales
attributable to Aeroglides aftermarket and other customer
relationships, an estimate that sales to these aftermarket and
other customers would be $12.6 million in 2008 prior to
factoring in customer attrition, an attrition rate (reflecting
the rate at which Aeroglides aftermarket and other
customer relationships are lost) of 10% per annum, a
risk-adjusted discount rate of 19%, and a remaining useful life
of 12 years.
Order backlog (representing unfulfilled customer orders for the
purchase of goods or services from Aeroglide) was valued at
$3.4 million using an excess earnings methodology, in which
an asset is valuable to the extent that the asset enables its
owner to earn a return in excess of the required returns on and
of the
44
other assets utilized in the business. Order backlog was
analyzed separately for each of the capital equipment and
aftermarket and other segments of the business, as described in
the following two paragraphs.
Capital equipment order backlog was valued at $2.6 million.
The key assumptions in this analysis were an economic margin of
12.4%, order backlog sales of $19.0 million to be fulfilled
in six months, and a risk-adjusted discount rate of 18%.
Aftermarket and other order backlog was valued at
$0.8 million. The key assumptions in this analysis were an
economic margin of 21.3%, order backlog sales of
$3.2 million to be fulfilled in three months, and a
risk-adjusted discount rate of 18%.
The trade names were valued at $3.4 million using a royalty
savings methodology, in which an asset is valuable to the extent
that ownership of the asset relieves the company from the
obligation of paying royalties for the benefits generated by the
asset. The key assumptions in this analysis were a royalty rate
equal to 1% of sales, a royalty sales base equal to 100% of
Aeroglides total sales, a risk-adjusted discount rate of
19%, and an indefinite remaining useful life.
The process know-how (representing Aeroglides
institutional knowledge and collective technical expertise
regarding various industrial applications of process driers and
coolers) was valued at $2.0 million using a royalty savings
methodology, in which an asset is valuable to the extent that
ownership of the asset relieves the company from the obligation
of paying royalties for the benefits generated by the asset. The
key assumptions in this analysis were a royalty rate equal to 1%
of sales, an initial royalty sales base equal to 100% of
Aeroglides total sales, an obsolescence factor (reflecting
the rate at which the utility of the core technology degrades
relative to time) of 5% per annum, a risk-adjusted discount
rate of 19%, and a remaining useful life of 13 years.
The non-competition agreements were valued in aggregate (for 10
Aeroglide executives) at $0.45 million using a lost profits
methodology, in which such agreements are valuable to the extent
that the company avoids suffering a reduction in cash flow by
virtue of the protection afforded by the agreements. The key
assumptions in this analysis were an estimated loss of 5% of
annual revenues during a hypothetical two-year period of
competition from the subject executives, a 20% probability each
year the subject executives would compete in the absence of the
agreements, a risk-adjusted discount rate of 19%, and a
remaining useful life of two years.
The value assigned to minority interest was derived from the
equity value contributed by the minority holders at the time of
acquisition.
1. Reflects (1) purchase accounting adjustments to
reflect Aeroglides assets acquired and liabilities assumed
at their estimated fair values, (2) redemption of existing
debt of Aeroglide and (3) elimination of historical
shareholders equity:
|
|
|
|
|
Property and equipment
|
|
$
|
2,553
|
|
Goodwill
|
|
|
20,792
|
|
Intangible assets
|
|
|
22,250
|
|
Other assets
|
|
|
(1,478
|
)
|
Current portion of long-term debt
|
|
|
1,324
|
|
Long-term debt
|
|
|
4,058
|
|
Deferred tax liability
|
|
|
71
|
|
Other liabilities
|
|
|
1,703
|
|
Establishment of minority interest
|
|
|
(2,350
|
)
|
Elimination of historical
shareholders equity
|
|
|
7,406
|
|
|
|
|
|
|
Cash used to fund acquisition
|
|
$
|
56,329
|
|
|
|
|
|
|
f. Halo Acquisition
The following information represents the pro forma adjustments
made by us in Note 1 to reflect our acquisition of a 73.6%
equity interest in, and loans to Halo for a total cash
investment of approximately
45
$61.9 million. This investment of $61.9 million was
assigned to assets of $98.0 million, current liabilities of
$19.5 million consisting of the historical carrying values
for accounts payable and accrued expenses, $13.8 million to
deferred tax liabilities and $2.8 million to minority
interest. The asset allocation represents $29.1 million of
current assets valued at their historical carrying values,
property and equipment of $1.9 million valued through a
preliminary asset appraisal, $35.5 million of intangible
and other assets and $31.5 million of goodwill representing
the excess of the purchase price over identifiable assets. The
preliminary intangible asset values consist principally of the
customer relationships and order processing network valued at
$30.0 million, trade names valued at $5.1 million and
non-compete covenants valued at $0.4 million.
The customer relationships and order processing network were
valued at $30.0 million using an excess earnings
methodology, in which an asset is valuable to the extent that
the asset enables its owner to earn a return in excess of the
required returns on and of the other assets utilized in the
business. The key assumptions in this analysis were an economic
margin of approximately 3.5% (on average) of sales attributable
to Halos account executive relationships, an estimate that
sales attributable to these account executive relationships
would be $131.8 million in 2008 prior to factoring in
attrition, an attrition rate (reflecting the rate at which
Halos account executive relationships are lost) of
5% per annum, a risk-adjusted discount rate of 15%, and a
remaining useful life of 15 years.
The trade names were valued at $5.1 million using a royalty
savings methodology, in which an asset is valuable to the extent
that ownership of the asset relieves the company from the
obligation of paying royalties for the benefits generated by the
asset. The key assumptions in this analysis were a royalty rate
equal to 0.5% of sales, a royalty sales base equal to 100% of
Halos total sales, a risk-adjusted discount rate of 15%,
and an indefinite remaining useful life.
The non-competition agreements were valued in aggregate (for two
Halo executives) at $0.37 million using a lost profits
methodology, in which such agreements are valuable to the extent
that the company avoids suffering a reduction in cash flow by
virtue of the protection afforded by the agreements. The key
assumptions in this analysis were an estimated loss of 5% of
annual revenues during a hypothetical two-year period of
competition from the subject executives, a 5% probability each
year the subject executives would compete in the absence of the
agreements, a risk-adjusted discount rate of 15%, and a
remaining useful life of three years.
The value assigned to minority interest was derived from the
equity value contributed by the minority holders at the time of
acquisition.
1. Reflects (1) purchase accounting adjustments to
reflect Halos assets acquired and liabilities assumed at
their estimated fair values, (2) redemption of existing
debt of Halo and (3) elimination of historical
shareholders equity:
|
|
|
|
|
Property and equipment
|
|
$
|
918
|
|
Goodwill
|
|
|
23,345
|
|
Intangible assets
|
|
|
35,470
|
|
Other assets
|
|
|
(1,220
|
)
|
Deferred income taxes
|
|
|
516
|
|
Current portion of long-term debt
|
|
|
1,096
|
|
Long-term debt
|
|
|
7,703
|
|
Long-term deferred income taxes
|
|
|
(13,657
|
)
|
Establishment of minority interest
|
|
|
(2,751
|
)
|
Elimination of historical
shareholders equity
|
|
|
10,449
|
|
|
|
|
|
|
Cash used to fund acquisition
|
|
$
|
61,869
|
|
|
|
|
|
|
46
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
A.
|
|
|
|
|
|
|
The following entries represent
the pro forma adjustments made by us in Note 1 to reflect the
effect of our acquisition of Aeroglide upon the results of their
operations for the year ended December 31, 2006 as if we
had acquired Aeroglide at the beginning of the fiscal year
presented:
|
|
|
|
|
|
|
|
|
|
1.
|
|
|
Additional amortization expense of intangible assets resulting from the acquisition of Aeroglide:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship capital equipment of $5,000 which will be amortized over 10 years
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
Customer relationship after market of $8,000 which will be amortized over 11 years
|
|
|
727
|
|
|
|
|
|
|
|
|
|
Order backlog of $3,400 which will be amortized over less than 1 year
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
Process know-how of $2,000 which will be amortized over 13 years
|
|
|
154
|
|
|
|
|
|
|
|
|
|
Non-compete covenants of $450 which will be amortized over 2 years
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
|
Reduction of interest expense with respect to the $5,382 of debt redeemed in connection with the acquisition of Aeroglide
|
|
$
|
(594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
|
Additional depreciation expense resulting from the acquisition of Aeroglide
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
|
Tax impact of adjustments 1 to 3
above
|
|
$
|
(1,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
|
|
|
|
|
|
The following entries represent
the pro forma adjustments made by us in Note 1 to reflect the
effect of our acquisition of Halo upon the results of their
operations for the year ended December 31, 2006 as if we
had acquired Halo at the beginning of the fiscal year presented:
|
|
|
|
|
|
|
|
|
|
1.
|
|
|
Additional amortization expense of intangible assets resulting from the acquisition of Halo:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and order processing network of $30,000 which will amortized over 15 years
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
Non-compete agreement of $370 which will be amortized over 3 years
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
|
Reduction of interest expense with respect to $8,799 of debt redeemed in connection with acquisition of Halo
|
|
$
|
(797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
|
Additional depreciation expense resulting from the acquisition of Halo
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
|
Tax impact of adjustments 1 to 3
above
|
|
$
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
|
|
|
|
|
|
Adjustment to record the
additional estimated management fee expense pursuant to the
Management Services Agreement to be incurred in connection with
the acquisition of Aeroglide and Halo.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net purchase price of Aeroglide
|
|
$
|
56,329
|
|
|
|
|
|
|
|
|
|
Net purchase price of Halo
|
|
|
61,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional net assets
|
|
|
118,198
|
|
|
|
|
|
|
|
|
|
Management fee %
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
D.
|
|
|
|
|
|
|
Adjustment to reduce interest
expense with the assumption that the $50.0 million of
unapplied proceeds from the offering that would have reduced
outstanding third party debt borrowings. The amount was
calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on $50.0 million at an average rate of 9.5% since May 16, 2006
|
|
$
|
(2,968
|
)
|
|
|
|
|
|
|
|
|
Additional unused fee on revolving
loan commitment
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
|
|
|
|
|
|
|
Adjustment to record the minority
interest in net income. The adjustment for minority interest was
calculated by applying the minority ownership percentage for
Aeroglide and Halo to the net income applicable to the minority
interest holders
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Pro Forma
loss from continuing operations per share
|
Pro forma loss from continuing operations per share is $(1.21)
for the year ended December 31, 2006, reflecting the shares
issued from this offering as if such shares were outstanding
from the beginning of the respective period and was calculated
as follows:
|
|
|
|
|
Net loss
|
|
$
|
(27,077
|
)(a)
|
Pro forma weighted average number
of shares outstanding:
|
|
|
|
|
Actual weighted average
outstanding for 2006
|
|
|
12,686
|
|
Shares from this offering and from
the separate private placement(1)
|
|
|
9,765
|
|
|
|
|
|
|
|
|
|
22,451
|
(b)
|
|
|
|
|
|
Pro forma net loss from continuing
operations per share (a divided by b)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
(1) |
|
Pro forma weighted average number of shares outstanding was
derived by dividing the estimated gross proceeds from the
offering and the separate private placement transaction by the
assumed price per share of $17.00. |
48
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 prospectus. On January 5, 2007, we
executed a purchase and sale agreement to sell our
majority-owned subsidiary, Crosman, for approximately
$143 million in cash. As a result, the operating results of
Crosman for the period of its acquisition by us (May 16,
2006) through December 31, 2006 are being reported as
discontinued operations in accordance with SFAS 144, and as
such are not included in the data below. We will recognize a
gain of approximately $35.9 million from the sale of
Crosman in fiscal year 2007.
Selected financial data below includes the results of
operations, cash flow and balance sheet data of the company for
the years ended December 31, 2005 and 2006. We were
incorporated on November 18, 2005. Financial data included
for the year ended December 31, 2005, therefore only
includes the minimal activity experienced from inception to
December 31, 2005.
We completed the IPO on May 16, 2006 and used the proceeds
of the IPO, separate private placement transactions that closed
in conjunction with the IPO and from our third party credit
facility to purchase controlling interests in four businesses.
On August 1, 2006, we purchased a controlling interest in
an additional business, Anodyne. Financial data included below
therefore only includes activity in our businesses from
May 16, 2006 through December 31, 2006, and in the
case of Anodyne, from August 1, 2006 through
December 31, 2006.
Because we completed the purchase of Aeroglide and Halo in
February 2007, financial data is not presented for these
businesses.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands,
|
|
|
|
except per share data)
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
410,873
|
|
|
$
|
|
|
Cost of sales
|
|
|
311,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
99,232
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Staffing
|
|
|
34,345
|
|
|
|
|
|
Selling, general and administrative
|
|
|
36,732
|
|
|
|
1
|
|
Management fee
|
|
|
4,376
|
|
|
|
|
|
Supplemental put expense
|
|
|
22,456
|
|
|
|
|
|
Research and development expense
|
|
|
1,806
|
|
|
|
|
|
Amortization expense
|
|
|
6,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(7,257
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(27,636
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations, net of income tax
|
|
$
|
8,387
|
|
|
$
|
|
|
Net loss
|
|
$
|
(19,249
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
20,563
|
|
|
$
|
|
|
Cash (used in) investing activities
|
|
|
(362,286
|
)
|
|
|
|
|
Cash provided by financing
activities
|
|
|
351,073
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
9,350
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Basic and fully diluted loss from
continuing operations per share
|
|
$
|
(2.18
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted loss per
share
|
|
$
|
(1.52
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
140,356
|
|
|
$
|
3,408
|
|
Total assets
|
|
|
525,597
|
|
|
|
3,408
|
|
Current liabilities
|
|
|
162,872
|
|
|
|
3,309
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
242,755
|
|
|
|
3,309
|
|
Minority interests
|
|
|
27,131
|
|
|
|
100
|
|
Shareholders equity (deficit)
|
|
|
255,711
|
|
|
|
(1
|
)
|
49
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This managements discussion and analysis of financial
condition and results of operations contains 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. 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.
Overview
Compass Diversified Trust, 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 amended and restated trust agreement, dated
as of April 25, 2006, which we refer to as 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. Our 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.
We acquire and manage middle market businesses based in North
America with annual cash flows between $5 million and
$40 million. We seek to acquire controlling ownership
interests in the businesses in order to maximize our ability to
work actively with the management teams of those businesses. Our
model for creating shareholder value is to be disciplined in
identifying and valuing businesses, to work closely with
management of the businesses we acquire to grow the cash flows
of those businesses, and to exit opportunistically businesses
when we believe that doing so will maximize returns. We
currently own six businesses in six distinct industries and we
believe that these businesses will continue to produce stable
and growing cash flows over the long term, enabling us to meet
our objectives of growing distributions to our shareholders,
independent of any incremental acquisitions we may make, and
investing in the long-term growth of the company.
In identifying acquisition candidates, we target businesses that:
|
|
|
|
|
produce stable cash flows;
|
|
|
|
have strong management teams largely in place;
|
|
|
|
maintain defensible positions in industries with forecasted
long-term macroeconomic growth; and
|
|
|
|
face minimal threat of technological or competitive obsolescence.
|
We maintain a long-term ownership outlook which we believe
provides us the opportunity to develop more comprehensive
strategies for the growth of our businesses through various
market cycles, and will decrease the possibility, often faced by
private equity firms or other financial investors, that our
businesses will be sold at unfavorable points in a market cycle.
Furthermore, we provide the financing for both the debt and
equity in our acquisitions, which allows us to pursue growth
investments, such as add-on acquisitions, that might otherwise
be restricted by the requirements of a third-party lender. We
have also found sellers to be attracted to our ability to
provide both debt and equity financing for the consummation of
acquisitions, enhancing the prospect of confidentiality and
certainty of consummating these transactions. In addition, we
believe that our ability to be long-term owners alleviates the
concern that many private company owners have with regard to
their businesses going through multiple sale processes in a
short period of time and the disruption that this may create for
their employees or customers.
50
Our management teams strategy for our subsidiaries
involves:
|
|
|
|
|
utilizing structured incentive compensation programs tailored to
each business to attract, recruit and retain talented managers
to operate our businesses;
|
|
|
|
regularly monitoring financial and operational performance,
instilling consistent financial discipline, and supporting
management in the development and implementation of information
systems to effectively achieve these goals;
|
|
|
|
assisting management in their analysis and pursuit of prudent
organic cash flow growth strategies (both revenue and cost
related);
|
|
|
|
identifying and working with management to execute attractive
external growth and acquisition opportunities; and
|
|
|
|
forming strong subsidiary level boards of directors to
supplement management in their development and implementation of
strategic goals and objectives.
|
Based on the experience of our management team and its ability
to identify and negotiate acquisitions, we believe we are
positioned to acquire additional attractive businesses. Our
management team has a large network of 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 teams 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 Initial Acquisitions
On May 16, 2006, we completed the IPO of
13,500,000 shares of the trust at an offering price of
$15.00 per share. 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 at the IPO price per share for
approximately $86.0 million and completed the private
placement of 266,667 shares at the IPO price per share per
share to Pharos, 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.
On May 16, 2006, we also entered into a financing
agreement, which we refer to as the prior financing agreement,
which was a $225 million secured credit facility with
Ableco Finance LLC, as collateral and administrative agent. On
November 22, 2006, we terminated the prior financing
agreement and entered into a new $255 million revolving
credit facility, which we refer to as the revolving credit
facility, with Madison Capital Funding, LLC, which we refer to
as Madison, as agent.
We used the net proceeds of the IPO, the separate private
placements that closed in conjunction with the IPO, and initial
borrowings under our prior financing agreement to make loans to
and acquire
51
controlling interests in each of the following businesses from
certain subsidiaries of CGI and from certain minority owners of
each business, which include:
|
|
|
|
|
a loan was made to and a controlling interest in CBS Personnel
was purchased totaling $127.8 million. Our controlling
interest represented at the time of purchase approximately 97.6%
of the outstanding stock of CBS Personnel on a primary basis and
approximately 94.4% on a fully diluted basis, after giving
effect to the exercise of vested and in-the-money options and
vested non-contingent warrants;
|
|
|
|
a loan was made to and a controlling interest in Crosman was
purchased totaling $72.6 million. Our controlling interest
represented approximately 75.4% of the outstanding stock of
Crosman on a primary basis and 73.8% on a fully diluted basis;
|
|
|
|
a loan was made to and a controlling interest in Advanced
Circuits was purchased for approximately $81.0 million. Our
controlling interest represented approximately 70.2% of the
outstanding stock of Advanced Circuits on a primary and fully
diluted basis; and
|
|
|
|
a loan was made to and a controlling interest in Silvue was
purchased for approximately $37.5 million. Our controlling
interest represented approximately 73.0% of the outstanding
stock of Silvue on a primary and fully diluted basis.
|
At the close of the acquisitions of the initial businesses, the
companys board of directors engaged our 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.
We are dependent upon the earnings of and cash distributions
from, the businesses that we own to meet our corporate overhead
and management fee expenses and to pay distributions. These
earnings, net of any minority interests in these businesses,
will be available:
|
|
|
|
|
first, to meet capital expenditure requirements, management fees
and corporate overhead expenses;
|
|
|
|
second, to fund distributions from the businesses to the
company; and
|
|
|
|
third, to be distributed by the trust to shareholders.
|
Anodyne
Acquisition
On August 1, 2006, we acquired approximately 47.3% of the
outstanding capital stock, on a fully diluted basis, of Anodyne
which represents approximately 69.8% of the voting power of all
Anodyne stock from CGI and Compass Medical Mattresses Partners,
LP, a wholly owned, indirect subsidiary of CGI.
The purchase price aggregated $31.1 million for the Anodyne
stock, all outstanding debt to the seller under Anodynes
credit facility, which we refer to as original loans, and a
promissory note issued by a borrower controlled by
Anodynes chief executive officer totaling
$5.2 million, which we refer to as the promissory note,
which purchase price was paid by the company in the form of
$17.3 million in cash and 950,000 of our newly issued
shares. The shares were valued at $13.1 million, or $13.77
per share. Transaction expenses were approximately $700,000. The
cash consideration was funded through available cash and a
drawing on our prior financing agreement of approximately
$18.0 million.
On October 5, 2006 Anodyne acquired Anatomic Concepts,
Inc., which we refer to as Anatomic. The cash purchase price was
approximately $8.6 million all of which was funded by loans
from the company. In addition, costs totaling $0.5 million
were accrued in connection with the acquisition. Anatomic
designs, manufactures and distributes medical support surfaces
and medical patient positioning devices, including mattresses,
mattress overlays and replacements, operating room patient
positioning devices, operating table pads and related
accessories. Anatomic is located in Corona, California.
52
Recent
Developments
Crosman
Disposition
On January 5, 2007, we sold all of our interest in Crosman,
an operating segment, for approximately $143 million.
Closing and other transaction costs totaled approximately
$2.4 million. Our share of the proceeds, after accounting
for the redemption of Crosmans minority holders and the
payment of CGMs profit allocation of $7.9 million was
approximately $110 million. We will recognize a gain on the
sale of approximately $35.9 million in fiscal 2007. We used
$85.0 million of the net proceeds to repay amounts
outstanding under the companys revolving credit facility.
The remaining net proceeds were invested in short-term
investment securities pending future application. We did not pay
a corresponding distribution of any of the proceeds from this
sale.
Our consolidated financial statements reflect the activity of
Crosman, as a discontinued operation in accordance with
SFAS No. 144, Accounting for the impairment
or disposal of long-lived assets.
The following table presents Crosmans results of
operations from May 16, 2006 through December 31, 2006
reflected in our consolidated financial statements as
discontinued operations:
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Net sales
|
|
$
|
72,316
|
|
Costs and expenses
|
|
|
59,039
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
13,277
|
|
Other income, net
|
|
|
182
|
|
|
|
|
|
|
Income from discontinued
operations before taxes
|
|
|
13,459
|
|
Provision for taxes
|
|
|
3,367
|
|
Minority interests
|
|
|
1,705
|
|
|
|
|
|
|
Net income from discontinued
operations(1)
|
|
$
|
8,387
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount does not include intercompany interest expense
incurred totaling approximately $3.2 million. |
Aeroglide
Acquisition
On February 28, 2007, we purchased a controlling interest
in Aeroglide Corporation which we refer to as Aeroglide.
Aeroglide is a leading global designer and manufacturer of
industrial drying and cooling equipment. Aeroglide provides
specialized thermal processing equipment designed to remove
moisture and heat as well as roast, toast and bake a variety of
processed products. Its machinery includes conveyer driers and
coolers, impingement driers, drum driers, rotary driers,
toasters, spin cookers and coolers, truck and tray driers and
related auxiliary equipment and is used in the production of a
variety of human foods, animal and pet feeds and industrial
products. Aeroglide utilizes an extensive engineering department
to custom engineer each machine for a particular application.
Aeroglide had sales of approximately $48 million for the
year ended December 31, 2006.
On February 28, 2007, we made loans to and purchased a
controlling interest in Aeroglide totaling $57 million. Our
controlling interest represents approximately 89% of the
outstanding stock. The cash consideration was funded through
available cash and a drawing on our revolving credit facility.
Halo
Acquisition
On February 28, 2007, we purchased a controlling interest
in Halo Branded Solutions, Inc. which we refer to as Halo, and
which operates under the brand names of Halo and Lee Wayne. Halo
serves as a one-stop shop for over 30,000 customers providing
design, sourcing, management and fulfillment services across all
categories of its customers promotional product needs.
Halo has established itself as a leader in the
53
promotional products and marketing industry through its focus on
service through its approximately 700 account executives. Halo
had sales of approximately $116 million for the year ended
December 31, 2006.
On February 28, 2007, we made loans to and purchased a
controlling interest in Halo totaling $61 million. Our
controlling interest represents approximately 73.6% of the
outstanding equity. The cash consideration was funded through
available cash and a drawing on our revolving credit facility.
We expect that both businesses will be accretive to cash flow
available for distribution in fiscal 2007 and beyond.
Results
of Operations
We were formed on November 18, 2005 and acquired our
initial businesses on May 16, 2006 and Anodyne on
July 31, 2006, and, therefore cannot provide a comparison
of our consolidated results of operations for the year ended
December 31, 2006 with any prior year. In the following
results of operations, we provide (i) our consolidated
results of operations for the years ended December 31, 2006
and 2005, which includes the results of operations of our
businesses (segments) as of May 16, 2006 and the results of
operations of Anodyne from August 1, 2006,
(ii) comparative and unconsolidated results of operations
for each of the initial businesses, on a stand-alone basis, for
years ended December 31, 2006 and 2005, and
(iii) unconsolidated results of operations for Anodyne from
August 1, 2006. Anodyne was formed in 2005, began business
operations in February 2006 and was acquired by us on
August 1, 2006. As a result, comparative results of
operations are not available.
Consolidated
Results of Operations Compass Diversified Trust and
Compass Group Diversified Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Net sales
|
|
$
|
410,873
|
|
|
$
|
|
|
Cost of sales
|
|
|
311,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
99,232
|
|
|
|
|
|
Selling, general and
administrative expense
|
|
|
71,077
|
|
|
|
1
|
|
Fees to manager
|
|
|
4,376
|
|
|
|
|
|
Supplemental put cost
|
|
|
22,456
|
|
|
|
|
|
Amortization of intangibles
|
|
|
6,774
|
|
|
|
|
|
Research and development expense
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(7,257
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
We do not generate any revenues apart from those generated by
the businesses we own, control or operate. 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.
Pursuant to the management services agreement, we pay our
manager a quarterly management fee equal to 0.5% (2.0%
annualized) of our adjusted net assets as of the last day of
each fiscal quarter. (See Related Party
Transactions). We accrue for the management fee on a
quarterly basis. For the year ended December 31, 2006 we
incurred approximately $4.4 million in expense for these
fees.
In addition, concurrent with the IPO, we entered into a
supplemental put agreement with our manager pursuant to which
our manager has the right to cause us to purchase the allocation
interests then owned by it upon termination of the management
services agreement. The company accrued approximately
$22.5 million
54
in non-cash expense during the year ended December 31, 2006
in connection with this agreement. This expense represents that
portion of the estimated increase 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 (see
Related Party Transactions).
We acquired our initial businesses on May 16, 2006. As a
result, our consolidated operating results only include the
results of operations for the 230 day period between
May 16, 2006 and December 31, 2006. The following
reflects a comparison of the historical results of operations
for each of our initial businesses for the entire twelve-month
period ending December 31, 2006, which we believe is a more
meaningful comparison in explaining the historical financial
performance of the business. These results of operations do not
reflect any purchase accounting adjustments from our acquisition
and are not necessarily indicative of the results to be expected
for the full year going forward.
Advanced
Circuits
Overview
Advanced Circuits is a provider of prototype, quick-turn and
volume production PCBs to customers throughout the United
States. Collectively, prototype and quick-turn PCBs represent
66.0% 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 by
approximately 60% 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.
Over the past three years, Advanced Circuits has continued to
improve its internal production efficiencies and enhance its
service capabilities, resulting in increased profit margins.
Additionally, Advanced Circuits has benefited from increased
production capacity as a result of a facility expansion that was
completed in 2003.
Advanced Circuits does not depend or expect to depend upon any
customer or group of customers, with no single customer
accounting for more than 2% of its net sales. Advanced Circuits
receives orders from over 8,000 customers and adds approximately
225 new customers per month.
In September 2005, a subsidiary of CGI acquired Advanced
Circuits, Inc. along with R.J.C.S. LLC, an entity previously
established solely to hold Advanced Circuits real estate
and equipment assets. Immediately following the acquisitions,
R.J.C.S. LLC was merged into Advanced Circuits, Inc. The results
for the year ended December 31, 2005, reflects the combined
results of the two businesses. The following section discusses
the historical financial performance of the combined entities.
55
Results
of Operations
Fiscal
Year Ended December 31, 2006 Compared to Fiscal Year Ended
December 31, 2005
The table below summarizes the combined statement of operations
for Advanced Circuits for the fiscal years ending
December 31, 2006 and December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Net sales
|
|
$
|
48,139
|
|
|
$
|
41,969
|
|
Cost of sales
|
|
|
18,888
|
|
|
|
18,102
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,251
|
|
|
|
23,867
|
|
Selling, general and
administrative expenses
|
|
|
14,934
|
|
|
|
8,283
|
|
Amortization of intangibles
|
|
|
2,731
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
11,586
|
|
|
$
|
14,867
|
|
|
|
|
|
|
|
|
|
|
Net
sales
Net sales for the year ended December 31, 2006 was
approximately $48.1 million as compared to approximately
$42.0 million for the year ended December 31, 2005, an
increase of approximately $6.2 million or 14.7%. The
increase in net sales was largely due to increased sales in
quick-turn production PCB, and prototype production, which
increased by approximately $2.5 million and
$1.8 million, respectively, and the addition of new
customers from increased marketing efforts. Quick-turn
production PCBs represented approximately 32.1% of gross sales
for the year ended December 31, 2006 as compared to
approximately 32.0% for the fiscal year ended December 31,
2005. Prototype production represented approximately 33.4% of
sales for the fiscal year ended December 31, 2006 compared
to approximately 34% for the fiscal year ended December 31,
2005.
Cost of
sales
Cost of sales for the year ended December 31, 2006 was
approximately $18.9 million, or 39.2% of net sales, as
compared to approximately $18.1 million, or 43.1% of net
sales, for the year ended December 31, 2005, an increase of
approximately $0.8 million or 4.3%. The increase in cost of
sales was largely due to the increase in production volume
offset in part by efficiencies realized from the increased
capacity utilization at the Aurora Colorado facility.
Gross profit margin increased by approximately 3.9% to
approximately 60.8% for the year ended December 31, 2006 as
compared to approximately 56.9% for the year ended
December 31, 2005. The increase is due to increased
capacity utilization. These benefits were partially offset by
increased costs of laminates, Advanced Circuits primary
raw material component in the production of PCBs.
Selling,
general and administrative expenses
Selling, general and administrative expenses for the year ended
December 31, 2006 were approximately $14.9 million, or
31.0% of net sales, as compared to approximately
$8.3 million, or 19.7% of net sales, for the year ended
December 31, 2005, an increase of approximately
$6.7 million, or 80.3%. Approximately $3.8 million of
the increase was due to loan forgiveness arrangements provided
to Advanced Circuits management associated with CGIs
acquisition of Advanced Circuits. Additionally, approximately
$0.3 million of the increase was due to increased
advertising expenditures with the remainder of the increase due
to increased compensation and other professional fees due
principally to the increase in sales and scope of operations.
56
Amortization
of intangibles
Amortization of intangibles for the year ended December 31,
2006 was approximately $2.7 million, or 5.7% of net sales,
compared to approximately $0.7 million, or 1.7% of net
sales, for the year ended December 31, 2005. This increase
was due to the significant increase in the amortization of
intangibles acquired as a result of the acquisition on
September 20, 2005 and reflected for four fiscal quarters
in 2006 compared to only one fiscal quarter in 2005.
Income
from operations
Income from operations was approximately $11.6 million, or
24.1% of net sales, for the year ended December 31, 2006 as
compared to approximately $14.9 million, or 35.4% of net
sales, for the year ended December 31, 2005, a decrease of
approximately $3.3 million or 22.1%. The decrease in income
from operations was principally due to the non-cash costs
associated with loan forgiveness compensation arrangements
totaling approximately $3.8 million in fiscal 2006. We
expect there to be additional such
non-cash
charges in the future.
CBS
Personnel
Overview
CBS Personnel, a provider of temporary staffing services in the
United States, provides a wide range of human resources
services, including temporary staffing services, employee
leasing services, permanent staffing and
temporary-to-permanent
placement services. CBS Personnel derives a majority of its
revenues from its temporary staffing services, which generated
approximately 97.2% and 97.1% of revenues for fiscal years ended
December 31, 2006 and 2005, respectively. CBS Personnel
serves over 4,000 corporate and small business clients and
during an average week places over 24,000 temporary employees in
a broad range of industries, including manufacturing,
transportation, retail, distribution, warehousing, automotive
supply, construction, industrial, healthcare and financial
sectors.
As a result of relatively flat economic conditions, CBS
Personnels revenues increased slightly compared to fiscal
2005. As the salaries of temporary employees represent the
largest costs of providing staffing services, the increase in
number of temporary workers on hire has resulted in a
corresponding increase in CBS Personnels costs of
revenues. Based on forecasts of continued economic growth, CBS
Personnels management believes the demand for temporary
staffing services will continue to grow.
CBS Personnels 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. CBS Personnel
typically enters into new markets through acquisition. In
keeping with these strategies, CBS Personnel acquired
substantially all of the assets of PMC Staffing Solutions, Inc.,
d/b/a Strategic Edge Solutions (SES) on November 27, 2006.
This acquisition gave CBS Personnel a presence in the Baltimore,
Maryland area, while increasing its presence in the Chicago,
Illinois area. SES revenues for the eleven months ended
November 27, 2006 were approximately $31.4 million and
are not included in the information below. SES derives its
revenues primarily from the light industrial market. CBS
Personnel continues to view acquisitions as an attractive means
to enter new geographic markets.
57
Fiscal
Year Ended December 31, 2006 as Compared to Fiscal Year
Ended December 31, 2005
The table below summarizes the consolidated statement of
operations data for CBS Personnel for the fiscal years ended
December 31, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Revenues
|
|
$
|
551,080
|
|
|
$
|
543,012
|
|
Direct cost of revenues
|
|
|
446,820
|
|
|
|
441,685
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
104,260
|
|
|
|
101,327
|
|
Staffing expense
|
|
|
54,847
|
|
|
|
54,249
|
|
Selling, general and
administrative expenses
|
|
|
25,666
|
|
|
|
26,723
|
|
Amortization expense
|
|
|
2,687
|
|
|
|
1,902
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
21,060
|
|
|
$
|
18,453
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues for the year ended December 31, 2006 increased
approximately $8.1 million, or 1.5%, over the corresponding
twelve months ended December 31, 2005. Revenues from light
industrial staffing increased approximately $25.1 million
year over year, and included approximately $2.8 million
from the SES acquisition. This increase was partially offset by
a $10.7 million decrease in revenues from clerical
services, and a $5.0 million decrease in revenues from
medical and payroll services. The remaining decrease in revenues
is attributable to the remaining niche segments serviced by CBS
Personnel. These decreases in revenues include approximately
$7.1 million attributable to one specific customer that CBS
personnel stopped providing service for in the fourth quarter of
2005, due to the customers credit issues.
Direct
cost of revenues
Direct cost of revenues for the twelve months ended
December 31, 2006 were approximately $446.8 million,
or 81.1% of revenues, compared to approximately
$441.7 million, or 81.3% of revenues, for the year ended
December 31, 2005, an increase of approximately
$5.1 million, or 1.2%, principally due to those costs
associated with the increase in revenues and the SES
acquisition. The acquisition of SES accounted for approximately
$2.7 million of the increase. The remaining increase is the
result of higher revenue volume in temporary services, which was
substantially offset by lower workers compensation costs.
A favorable actuarial adjustment of approximately
$2.5 million was recorded in 2006, reflecting CBS
Personnels initiatives to reduce workers
compensation exposure and to settle claims.
Gross profit totaled approximately 18.9% and 18.7% as a
percentage of revenues in each of the twelve-month periods ended
December 31, 2006 and 2005, respectively. The increase in
gross profit as a percent of revenues is primarily attributable
to lower workers compensation costs as discussed above.
This decrease in workers compensation cost was partially
offset by a shift in product mix to larger accounts and light
industrial accounts, which typically have lower margins.
Staffing
expense
Staffing expense for the year ended December 31, 2006 was
approximately $54.8 million, or 9.9% of revenues, compared
to approximately $54.2 million, or 10.0% for the year ended
December 31, 2005. This increase of approximately
$0.6 million is principally due to cost associated with the
increase in revenues and for the SES acquisition.
58
Selling,
general and administrative expenses
Selling, general and administrative expenses were approximately
$25.7 million, or 4.7% of revenues for the year ended
December 31, 2006, compared to approximately
$26.7 million, or 4.9% of revenues, for the year ended
December 31, 2005, a decrease of approximately
$1.1 million, or 4.0%. The SES acquisition contributed to
an increase of approximately $0.1 million. This increase
was offset by nonrecurring costs associated with the equity
recapitalization and the SES acquisition in 2006 of
approximately $0.6 million compared to expenses of
approximately $1.2 million associated with the
reorganization of field operations in 2005 and by lower bad debt
expense of approximately $0.4 million in fiscal 2006.
Amortization
expense
Amortization expense increased approximately $0.8 million
in the twelve months ended December 31, 2006 as a result of
the recapitalization in connection with CODIs purchase of
a controlling interest in CBS Personnel in May 2006. As part of
the recapitalization, CBS Personnel repaid their original
long-term debt, which required CBS to write off the remaining
balance of deferred financing costs of $1.6 million related
to that debt.
Income
from operations
Income from operations increased approximately $2.6 million
to $21.1 million, or 3.8% of revenues, for the year ended
December 31, 2006 compared to $18.5 million, or 3.4%
of revenues, for the year ended December 31, 2005
principally as a result of the factors described above.
Silvue
Overview
Silvue is a developer and producer of proprietary, high
performance liquid coating systems used in the high-end eyewear,
aerospace, automotive and industrial markets. Silvues
coating systems, which impart properties such as abrasion
resistance, improved durability, chemical resistance,
ultraviolet or UV protection, can be applied to a wide variety
of materials, including plastics, such as polycarbonate and
acrylic, glass, metals and other surfaces.
We believe that the hardcoatings industry will experience growth
as the use of existing materials requiring hardcoatings
continues to grow, new materials requiring hardcoatings are
developed and new uses of hardcoatings are discovered.
Silvues management expects additional growth in the
industry as manufacturers continue to outsource the development
and application of hardcoatings used on their products.
To respond to increasing demand for coating systems, Silvue is
focused on growth through the development of new products
providing either greater functionality or better value to its
customers. Silvue currently owns nine patents relating to its
coatings portfolio and continues to invest in the research and
development of additional proprietary products. Further, driven
by input from customers and the changing demands of the
marketplace, Silvue actively endeavors to identify new
applications for its existing products.
On August 31, 2004, Silvue was formed by CGI and management
to acquire SDC Technologies, Inc. and on September 2, 2004,
it acquired 100% of the outstanding stock of SDC Technologies,
Inc. Following this acquisition, on April 1, 2005, SDC
Technologies, Inc. purchased the remaining 50% it did not
previously own of Nippon Arc Co. LTD, which we refer to as
Nippon ARC, which was formerly operated as a joint venture with
Nippon Sheet Glass Co., LTD., for approximately
$3.6 million.
The results for the fiscal year ended December 31, 2005,
reflects the results of Silvue and its predecessor company, SDC
Technologies. In November 2005, Silvues management made
the strategic decision to halt operations at its application
facility in Henderson, Nevada. The operations included
substantially all of Silvues application services
business, which has historically applied Silvues coating
systems and other coating systems to customers products
and materials. The facility was shut down in November 2006.
59
Results
of Operations
Fiscal
Year Ended December 31, 2006 Compared to Year Ended
December 31, 2005
The table below summarizes the consolidated statement of
operations for Silvue for the fiscal year ended
December 31, 2006 and for the fiscal year ended
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Net sales
|
|
$
|
24,068
|
|
|
$
|
21,491
|
|
Cost of sales
|
|
|
7,098
|
|
|
|
7,497
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,970
|
|
|
|
13,994
|
|
Selling, general and
administrative expenses
|
|
|
8,426
|
|
|
|
7,552
|
|
Research and development costs
|
|
|
1,129
|
|
|
|
1,226
|
|
Amortization of intangibles
|
|
|
745
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6,670
|
|
|
|
4,507
|
|
|
|
|
|
|
|
|
|
|
Net
sales
Net sales for the year ended December 31, 2006 was
approximately $24.1 million as compared to approximately
$21.5 million for the year ended December 31, 2005, an
increase of approximately $2.6 million or 12.0%. This
increase was principally due to additional sales associated with
Nippon ARC of approximately $2.1 million. Nippon ARC,
purchased on April 1, 2005 contributed a full years
sales in 2006. In addition, growth within Silvues core
ophthalmic business and expansion in sales of Silvues
aluminum coatings products accounted for approximately
$1.7 million of the increase. These increases were offset
in part by the decrease in sales as a result of the closure of
the facility in Henderson, Nevada.
Cost of
sales
Cost of sales for the year ended December 31, 2006 was
approximately $7.1 million, or 29.5% of net sales, as
compared to approximately $7.5 million, or 34.9% of net
sales, for the year ended December 31, 2005, a decrease of
approximately $0.4 million or 5.3%. This decrease was
principally due to a reduction in costs associated with the
elimination of the application processing facility aggregating
approximately $1.2 million. This decrease was offset in
part by increased cost directly associated with the increased
sales at Silvues Nippon ARC operations totaling
approximately $0.9 million.
Selling,
general and administrative expenses
Selling, general and administrative expenses for the year ended
December 31, 2006 were approximately $8.4 million, or
35.0% of net sales, as compared to approximately
$7.6 million, or 35.1% of net sales, for the year ended
December 31, 2005, an increase of approximately
$0.8 million or 11.5%. The increase in selling, general and
administrative expenses was primarily due to (i) the
inclusion of Nippon ARC, which had selling, general and
administrative expenses of $1.8 million in fiscal 2006
compared to $1.5 million in fiscal 2005 and
(ii) increased legal and professional fees of
$0.5 million.
Research
and development costs
Research and development costs for the year ended
December 31, 2006 were approximately $1.1 million as
compared to approximately $1.2 million for the year ended
December 31, 2005.
Amortization
of intangibles
Amortization of intangibles was approximately $0.7 million
in each of the years ended December 31, 2006 and 2005.
60
Operating
income
Income from operations was approximately $6.7 million, or
27.7% of net sales for the year ended December 31, 2006 as
compared to approximately $4.5 million, or 21.0% of net
sales, for the year ended December 31, 2005, an increase of
approximately $2.2 million or 48.0%. This increase was
principally due to the acquisition of Nippon ARC which
contributed approximately $0.8 million in additional
operating income and from the organic growth in revenues from
existing ophthalmic customers and the expansion in sales in
aluminum coating products.
Anodyne
Overview
Anodyne was formed in early 2006 in order to purchase the assets
and operations of AMF and SenTech which were completed on
February 15, 2006. Both AMF and SenTech manufacture and
distribute patient positioning devices. On October 5, 2006,
Anodyne purchased a third manufacturer and distributor of
patient positioning devices, Anatomic Concepts. Anatomic
Concepts operations were merged into the AMF operations.
The medical support surfaces industry is fragmented in nature.
Management estimates the market is comprised of approximately 70
small participants who design and manufacture products for
preventing and treating decubitus ulcers. Decubitus ulcers, or
pressure ulcers, are formed on immobile medical patients through
continued pressure on one area of skin. Immobility caused by
injury, old age, chronic illness or obesity are the main causes
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 a small portion of the body surface. This pressure,
if continued for 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. Contributing factors to the development of pressure
ulcers are sheer, or pull on the skin due to the underlying
fabric, and moisture, which increases the propensity to
deteriorate.
The U.S. market for specialty beds and medical support surfaces
market was estimated to be $1.6 billion in 2005 and was
forecast to reach $2.9 billion by 2012 (Frost and
Sullivan). Management believes the medical support surfaces
industry 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.
Beyond favorable demographic trends, Anodynes management
believes hospitals are placing an increased emphasis on the
prevention of pressure ulcers. Frost and Sullivan estimates that
approximately one million pressure ulcers occur annually in the
United States generating an estimated $1.3 billion in
annual costs to hospitals alone. According to Medicare
reimbursement guidelines, pressure ulcers are eligible for
reimbursement by third party payers only when they are diagnosed
upon hospital admission. Additionally, third party payers only
provide reimbursement for preventative mattresses under limited
circumstances. The end result is that if an at risk patient
develops pressure ulcers while at the hospital, the hospital is
required to bear the cost of healing. As a result of increasing
litigation and the high cost of healing pressures ulcers,
hospitals are now focusing on using pressure relief equipment to
reduce the incidence of hospital acquired pressure ulcers.
Anodynes strategy for approaching this market includes
offering its customers consistently high quality products on a
national basis, leveraging its scale to provide industry leading
research and development and pursuing cost savings through scale
purchasing and operational efficiencies.
We purchased Anodyne from CGI on August 1, 2006. As such,
our consolidated financial statements include the results of
operations of Anodyne for the five month period ended
December 31, 2006. Anodynes results of operations
include the results of Anatomic Concepts since October 5,
2006. We have not presented comparative results for Anodyne, as
the company formed in 2006 and such comparisons are
61
unavailable. In addition, the following results of operations do
not reflect any purchase accounting adjustments resulting from
our acquisition.
Results
of Operations
The results of operations of Anodyne from February 15, 2006
to December 31, 2006 are shown in the following table:
|
|
|
|
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net sales
|
|
$
|
23,367
|
|
Cost of sales
|
|
|
17,505
|
|
Gross profit
|
|
|
5,862
|
|
Selling, general and
administrative expenses
|
|
|
4,901
|
|
Amortization expense
|
|
|
709
|
|
|
|
|
|
|
Income from operations
|
|
$
|
252
|
|
|
|
|
|
|
Anodynes sales were below expectations in fiscal 2006 due
primarily to the delay in fulfillment of a supply contract with
a major customer. The issues surrounding this delay have been
substantially resolved to date and management expects Anodyne to
record sales equal to or exceeding its current 2007 expectations.
Income from operations were lower than our expectations
primarily due to the delay in sales which also negatively
impacted cost of sales due to lower production capacity
utilization. Selling, general and administrative expenses were
as expected. We anticipate increased operating income for
Anodyne relative to sales in fiscal year 2007 as Anodynes
SenTech operations has begun to deliver additional sales.
Liquidity
and Capital Resources
On May 16, 2006 we completed the IPO and concurrent private
placement of our shares, each representing a beneficial interest
in the company. The net proceeds from these offerings after
underwriters commissions, discounts and offering costs
totaled approximately $269.8 million.
We used the net proceeds from the IPO and private placements
together with the $50 million term loan from our prior
financing agreement to acquire controlling interests in, and to
provide loans to, our initial businesses on May 16, 2006.
On August 1, 2006 we acquired a controlling interest in
Anodyne. As a consequence, our consolidated cash flows from
operating, financing and investing activities reflect the
inclusion of our businesses for the period between May 16,
2006 and December 31, 2006 and cash flows from
Anodynes results for five months (August 1, 2006
through December 31, 2006). Any comparison of our
consolidated cash flows for this partial period in 2006 to any
prior period is not meaningful.
At December 31, 2006, on a consolidated basis, cash flows
provided by operating activities totaled approximately
$20.6 million, which represents the inclusion of the
results of operations of the businesses for 230 days
(May 16, 2006 through December 31, 2006).
Cash flows used in investing activities totaled approximately
$362.3 million, which principally reflects the costs to
acquire the initial businesses and Anodyne. Cash flow provided
by financing activities totaled $351.1 million, principally
reflecting the net proceeds of the shareholder offerings and
draw-downs of debt from our revolving credit facility.
At December 31, 2006, we had approximately
$7.0 million of cash on hand and the following principal
amounts outstanding under loans due from each of our businesses:
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|
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CBS Personnel approximately $63.5 million;
|
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|
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Advanced Circuits approximately $37.3 million;
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62
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|
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|
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Silvue approximately $17.0 million; and
|
|
|
|
Anodyne approximately $21.2 million.
|
In addition, we had loans due from Crosman totaling
$50.5 million. These loans were repaid, together with
accrued interest from the net proceeds from the sale of Crosman
on January 5, 2007. See Note D, Discontinued
Operations, to the consolidated financial statements for
additional financial information of Crosman as of
December 31, 2006.
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.
In September 2006, our subsidiary Silvue borrowed approximately
$9.0 million in term loans from us in order to redeem its
outstanding cumulative preferred stock.
In October 2006, Anodyne borrowed an additional
$9.2 million in term loans in order finance its Anatomic
acquisition.
In November 2006, CBS borrowed approximately $5.0 million
in order to help finance its acquisition of SES.
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 of and cash flow
of these businesses, which are available for (i) operating
expenses; (ii) payment of principal and interest under our
revolving credit facility; (iii) payments to our manager
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
the company, which may require the company to dispose of assets
or incur debt to fund such expenditures. A non-cash charge to
earnings of approximately $22.5 million was recorded during
the year ended December 31, 2006 in order to recognize our
estimated, potential liability in connection with the
supplemental put agreement between us and our manager.
Approximately $7.9 million of this amount will be paid in
the first quarter of fiscal 2007 (see Related Party
Transactions). We believe that we currently have
sufficient liquidity and resources to meet our existing
obligations including anticipated distributions to our
shareholders over the next twelve months.
Concurrent with the IPO, we entered into a third party
$225 million prior financing agreement with Ableco Finance
LLC as agent, and other lenders. On November 21, 2006, we
terminated the prior financing agreement when we entered into
our new revolving credit facility and repaid all the outstanding
principal and interest under the prior financing agreement. We
initially borrowed $96.6 million of the revolving credit
facility to pay all amounts due under the prior financing
agreement and to pay for the fees and costs associated with
establishing the revolving credit facility.
On November 21, 2006, we obtained a $255 million
revolving credit facility with an option to increase the
facility by $45 million from a group of lenders led by
Madison Capital Funding, LLC as agent. The revolving credit
facility allows for loans at either base rate or 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, which we
refer to as the total debt to EBITDA ratio. LIBOR loans bear
interest at a fluctuating rate per annum equal to the LIBOR, 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.
The lenders agreed to issue letters of credit under the
revolving credit facility in an aggregate face amount not to
exceed $50 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 loan commitment thereunder.
63
The revolving credit facility is secured by all the assets of
the company, including our equity interests and loans to our
businesses. We paid approximately $4.6 million for
administrative and closing fees, which we are amortizing over
the life of the loan.
The revolving credit facility contains various covenants,
including financial covenants, with which we must comply. The
financial covenants include (i) a requirement to maintain,
on a consolidated basis, a fixed coverage ratio of at least
1.5:1, (ii) an interest coverage ratio not to exceed less
than 3:1 and (iii) a total debt to earnings before
interest, depreciation and amortization ratio of not to exceed
3:1. In addition, the revolving credit facility contains
limitations on, among other things, items, certain acquisition,
consolidations, sales of assets and the incurrence of debt. In
January 2007, the revolving credit facility was increased by
$5.0 million. Currently we are in compliance with all
covenants. Outstanding indebtedness under the revolving credit
facility will mature on November 21, 2011.
We intend to use our revolving credit facility to pursue
acquisitions of additional businesses to the extent permitted
under our revolving credit facility and to provide for working
capital needs. As of December 31, 2006, the company had
$85 million in revolving credit commitments outstanding
under the revolving credit facility. This amount was repaid with
the proceeds from the sale of Crosman on January 5, 2007.
On February 28, 2007, we purchased a majority interest in
two companies, Aeroglide and Halo. The total purchase price for
these acquisitions, including our share of the transactions
costs, aggregated $118.7 million. We funded the
transactions with excess cash on hand ($24.2 million),
resulting from the Crosman sale, and borrowings under our
revolving credit facility ($94.5 million). The availability
of our revolving credit facility was approximately
$106 million after the borrowing for these two acquisitions.
On July 18, 2006 we paid a distribution of $0.1327 per
share to all holders on record on July 11, 2006 and on
October 19, 2006 we paid a distribution $0.2625 per share
to holders of record on October 13, 2006. On
January 24, 2007, we paid a distribution of $0.30 per share
to holders of record on January 18, 2007. Respectively,
these distributions represent (i) a pro rata distribution
for the quarter ended June 30, 2006 and (ii) a full
distribution for the quarters ended September 30, 2006 and
December 31, 2006. We intend to continue to declare and pay
regular quarterly cash distributions. We anticipate generating
cash flow available for distribution of approximately
$41.2 million to $46.2 million or $1.62 to $1.82 per
share for fiscal 2007, assuming the completion of this offering
and the application of the proceeds thereof as described in the
Use of Proceeds section of this prospectus. Assuming
distributions would be paid at the same $0.30 per share rate as
paid in January 2007, the estimated cash flow available for
distribution for fiscal 2007 would yield an approximate coverage
ratio to the distributions paid for 2007 performance of 1.4x to
1.5x. This estimate is based on our achievement of 2007 budgeted
results for our businesses, including Aeroglide and Halo from
March 1, 2007, excluding the results of Crosman and the
gain from the sale of Crosman, which was sold on January 5,
2007. This estimate also assumes the consummation of a
$60 million acquisition (either add-on or new
platform business) on October 1, 2007, primarily funded by
excess proceeds from this offering, with the remainder of the
funding provided under the companys revolving credit
facility. There can be no assurance, however, that such an
acquisition will be either identified or consummated. The
estimate does not consider the impact of any additional
acquisitions or dispositions that we may complete in fiscal 2007
and includes numerous other assumptions that may or may not be
realized. See Forward-Looking Statements for a list
of the risks and uncertainties to which the estimate is subject.
Managements estimated cash available for distribution as
of December 31, 2006 is approximately $23.7 million.
Cash available for distribution is a non-GAAP measure that we
believe provides additional information to evaluate our ability
to make anticipated quarterly distributions. The table below
details cash receipts and payments that are not reflected on our
income statement in order to provide cash available for
distribution. Cash available for distribution is not necessarily
comparable with similar measures provided by other entities. We
believe that cash available for distribution, together with
future distributions and cash available from our businesses (net
of reserves) will be sufficient to meet our anticipated
distributions over the next twelve months. The table below
reconciles cash available for distribution to net income and to
cash
64
flow provided by operating activities, which we consider to be
the most directly comparable financial measure calculated and
presented in accordance with GAAP.
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Year Ended
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December 31, 2006
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($ in thousands)
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|
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Net loss
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$
|
(19,249
|
)
|
Adjustment to reconcile net loss
to cash provided by operating activities
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|
|
|
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Depreciation and amortization
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|
|
10,290
|
|
Supplemental put expense
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22,456
|
|
Silvues in-process R&D
expensed at acquisition date
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|
|
1,120
|
|
Advanced Circuits loan
forgiveness accrual
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|
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2,760
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Minority interest
|
|
|
2,950
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Deferred taxes
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|
|
(2,281
|
)
|
Loss on Ableco debt retirement
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|
|
8,275
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|
Other
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|
|
(450
|
)
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Changes in operating assets and
liabilities
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|
|
(5,308
|
)
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|
|
|
|
|
Net cash provided by operating
activities
|
|
|
20,563
|
|
Plus:
|
|
|
|
|
Unused fee on delayed term loan(1)
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|
|
1,291
|
|
Changes in operating assets and
liabilities
|
|
|
5,308
|
|
Less:
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|
|
|
|
Maintenance capital
expenditures(2)
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|
|
|
|
CBS Personnel
|
|
|
209
|
|
Crosman(3)
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|
|
1,926
|
|
Advanced Circuits
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|
|
392
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|
Silvue
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|
|
304
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|
Anodyne
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|
|
636
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|
|
|
|
|
|
Estimated cash flow available for
distribution
|
|
$
|
23,695
|
(a)
|
|
|
|
|
|
Distribution paid July 2006
|
|
$
|
(2,587
|
)
|
Distribution paid September 2006
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|
|
(5,368
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)
|
Distribution paid January 2007
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|
|
(6,135
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)
|
|
|
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|
Total distributions
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$
|
(14,090
|
)(b)
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|
|
|
|
|
Distribution Coverage
Ratio(a)¸(b)
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|
|
1.7
|
x
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the commitment fee on the unused portion of our
third-party loans. |
|
(2) |
|
Represents maintenance capital expenditures that were funded
from operating cash flow and excludes approximately
$2.3 million of growth capital expenditures for the period
ended December 31, 2006. |
|
(3) |
|
Crosman was sold on January 5, 2007 (see Note D to the
consolidated financial statements). |
Cash flows of certain of our businesses are seasonal in nature.
Cash flows from CBS Personnel 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 higher in the fourth quarter of each year than in
other quarters due to increased seasonal demands for calendars
and other promotional products among other factors.
Related
Party Transactions
We have entered into the following agreements with our manager.
Any fees associated with the agreements described below must be
paid, if applicable, prior to the payment of any distributions
to shareholders.
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management services agreement
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|
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LLC agreement
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|
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|
supplemental put agreement
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65
Management Services Agreement We entered into
a management services agreement with our manager effective
May 16, 2006. The management services agreement provides
for our manager to perform services for us in exchange for a
quarterly management fee equal to 0.5% (2.0% annualized) of our
adjusted net assets as of the last day of each fiscal quarter.
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,
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, 2006 we paid
approximately $4.4 million to our manager for its quarterly
management fees.
LLC Agreement As distinguished from its
position of providing management services to us, pursuant to the
management services agreement, our manager is also an equity
holder of 100% of the allocation interests of the company. As
such, our manager has the right to a distribution pursuant to a
profit allocation formula upon the occurrence of certain events.
Our manager has the right to cause the company to purchase the
allocation interests it owns under certain circumstances, (see
Supplemental Put Agreement below).
Supplemental Put Agreement Our manager is
also the owner of 100% of the allocation interests in the
company. Concurrent with the IPO, our manager 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 our manager require us to acquire our
managers allocation interests in the company at a price
based on a percentage of the increase in fair value in the
companys businesses over its 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 year ended December 31,
2006, we recognized approximately $22.5 million in non-cash
expense related to the supplemental put agreement. As a result
of the sale of Crosman on January 5, 2007, our manager is
currently due $7.9 million. We expect to pay our manager
this amount in the first fiscal quarter of 2007.
Anodyne Acquisition On August 1, 2006,
we acquired from CGI and its wholly-owned, indirect subsidiary,
Compass Medical Mattress Partners, LP which we refer to as 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. Pursuant to the
same agreement, we also acquired from the seller all outstanding
debt to seller under Anodynes credit facility, which we
refer to as original loans. On the same date, we purchased from
the seller a promissory note issued by a borrower controlled by
Anodynes chief executive officer totaling
$5.2 million, which we refer to as the promissory note. The
promissory note is secured by shares of Anodyne stock and
guaranteed by Anodynes chief executive officer. The
promissory note accrues interest at the rate of 13% per annum
and is added to the notes principal balance. The note
matures in August, 2008. The principal balance of the promissory
note and accrued interest totals approximately $5.4 million
at December 31, 2006. The purchase price for the Anodyne
stock, the original loans and the promissory note totaled
approximately $31.1 million, which was paid for in the form
of $17.3 million in cash and 950,000 shares of our
newly issued shares. The shares were valued at
$13.1 million, or $13.77 per share.
Our manager acted as an advisor to us in the Anodyne acquisition
for which it received transaction services fees and expense
payments totaling approximately $300,000.
Advanced Circuits Acquisition 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 $3,409,100 for the purchase of
136,364 shares of Advanced Circuits common stock. On
January 1, 2006, Advanced Circuits loaned certain officers
and members of management of Advanced Circuits $4,834,150 for
the purchase of an additional 193,366 shares of Advanced
Circuits common stock. The notes bear interest at 6% and
interest is added to the notes. The notes are due in September
2010 and December 2010 and are subject to mandatory prepayment
provisions if certain conditions are met.
Advanced Circuits granted the purchasers of the shares the right
to put to Advanced Circuits a sufficient number of shares at the
then fair market value of such shares, to cover the tax
liability that each
66
purchaser may have. Approximately $0.8 million of
compensation expense calculated using the Black Scholes model
related to these rights and is reflected in selling and general
administrative expenses for the year ended December 31,
2006.
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. The company believes that the
achievement of the loan forgiveness is probable and is accruing
any potential forgiveness over a service period measured from
the issuance of the notes until the actual measurement date of
December 31, 2010. During fiscal 2006, the company accrued
approximately $1.6 million for this loan forgiveness. This
expense is reflected as a component of general and
administrative expenses, and is a component of other liabilities
as of December 31, 2006.
Contractual
Obligations and Off-Balance Sheet Arrangements
We have no special purpose entities or off balance sheet
arrangements, other than operating leases entered into in the
ordinary course of business.
Long-term contractual obligations, except for our long-term debt
obligations, are generally not recognized in our consolidated
balance sheet. Non-cancelable purchase obligations are
obligations we incur during the normal course of business, based
on projected needs.
The table below summarizes the payment schedule of our
contractual obligations at December 31, 2006.
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|
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|
|
|
|
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|
|
|
|
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|
|
|
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Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
($ in thousands)
|
|
|
Operating Lease Obligations(1)
|
|
$
|
28,012
|
|
|
$
|
7,080
|
|
|
$
|
11,002
|
|
|
$
|
4,639
|
|
|
$
|
5,291
|
|
Purchase Obligations(2)
|
|
|
83,584
|
|
|
|
39,227
|
|
|
|
24,136
|
|
|
|
20,221
|
|
|
|
|
|
Supplemental Put Obligation(3)
|
|
|
14,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,298
|
|
|
$
|
46,307
|
|
|
$
|
35,138
|
|
|
$
|
24,860
|
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects various operating leases for office space,
manufacturing facilities and equipment from third parties with
various lease terms running from one to fourteen years. |
|
(2) |
|
Reflects non-cancelable commitments as of December 31,
2006, including: (i) shareholder distributions of
$24.5 million, (ii) management fees of
$9.6 million per year over the next five years and;
(iii) other obligations, including amounts due under
employment agreements. |
|
(3) |
|
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 $13.2 million at
December 31, 2006, is included in our balance sheet as a
component of other non-current liabilities.
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
67
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
estimates are generally consistent with the accounting policies
followed by the businesses we plan to acquire. 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 managers 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 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 record the supplemental
put agreement at its fair value quarterly 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. At any point in time, the
supplemental put liability recorded on the companys
balance sheet is our managers estimate of what its
allocation interests are worth based upon a percentage of the
increase in fair value of our businesses over our basis in those
businesses. Because the supplemental put price would be
calculated based upon an assumed profit allocation for the sale
of all of our businesses, the growth of the supplemental put
liability over time is indicative of our managers estimate
of the companys unrealized gains on its interests in our
businesses. A decline in the supplemental put liability is
indicative either of the realization of gains associated with
the sale a business and the corresponding payment of a profit
allocation to our manager (as with Crosman), or a decline in our
managers estimate of the companys unrealized gains
on its interests in our businesses. We account for the change in
the estimated value of the supplemental put liability on a
quarterly basis in our income statement. The expected value of
the supplemental put liability affects our results of operations
but it does not affect our cash flows or our cash flow available
for distribution. The valuation of the supplemental put
agreement requires the use of complex models, which require
highly sensitive 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.
In addition, CBS Personnel recognizes revenue for temporary
staffing services at the time services are provided by CBS
Personnel employees and reports revenue based on gross billings
to customers. Revenue from CBS Personnel 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 Emerging
Issue Task Force which we refer to as the EITF,
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. 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
68
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,
Intangible Assets and Property and Equipment
Trademarks are considered to be indefinite life intangibles.
Goodwill represents the excess of the purchase price over the
fair value of the assets acquired. Trademarks and goodwill are
not amortized. However, we will be 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 forecasts and comparing those estimated fair
values with the carrying values, which include the 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 units
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. The impairment test for trademarks
requires the determination of the fair value of such assets. If
the fair value of the trademark is less than its carrying value,
an impairment loss will be recognized in an amount equal to the
difference. 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. We use outside valuation experts when management
considers that it would be appropriate to do so.
Intangibles subject to amortization, including customer
relationships, noncompete 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 intangibles subject
to amortization whenever indications of impairment are present.
Property and equipment are initially stated at cost.
Depreciation on property and equipment computed using the
straight-line method over the estimated useful lives of the
property and equipment after consideration of historical results
and anticipated results based on our current plans. Our
estimated useful lives represent the period the asset is
expected to remain in service assuming normal routine
maintenance. We review the estimated useful lives assigned to
property and equipment when our business experience suggests
that they may have changed from our initial assessment. Factors
that lead to such a conclusion may include physical observation
of asset usage, examination of realized gains and losses on
asset disposals and consideration of market trends such as
technological obsolescence or change in market demand.
We perform impairment reviews of property and equipment, when
events or circumstances indicate that the value of the assets
may be impaired. Indicators include operating or cash flow
losses, significant decreases in market value or changes in the
long-lived assets physical condition. When indicators of
impairment are present, management determines whether the sum of
the undiscounted future cash flows estimated to be generated by
those assets is less than the carrying amount of those assets.
In this
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circumstance, the impairment charge is determined based upon the
amount by which the carrying value of the assets exceeds their
fair value. The estimates of both the undiscounted future cash
flows and the fair values of assets require the use of complex
models, which require numerous highly sensitive assumptions and
estimates.
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
CBS self-insures its workers compensation exposure for
certain employees. CBS establishes reserves based upon its
experience and expectations as to its ultimate liability for
those claims using developmental factors based upon historical
claim experience. CBS continually evaluates the potential for
change in loss estimates with the support of qualified
actuaries. As of December 31, 2006, CBS had approximately
$20.9 million of workers compensation liability. 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 the majority owned subsidiaries have deferred tax
assets recorded at December 31, 2006 which in total amount
to approximately $11.8 million. These deferred tax assets
are comprised of liabilities 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 K Income taxes to the
financial statements included elsewhere in this report).
Recent
Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board
issued Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes, which is effective
January 1, 2007. The purpose of FIN 48 is to clarify
and set forth consistent rules for accounting for uncertain tax
positions in accordance with FAS 109, Accounting for
Income Taxes. The cumulative effect of applying the
provisions of this interpretation is required to be reported
separately as an adjustment to the opening balance of retained
earnings in the year of adoption. We are in the process of
reviewing and evaluating FIN 48, and therefore the ultimate
impact of its adoption is not yet known.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements. This
standard clarifies the principle that fair value should be based
on the assumptions that market participants would use when
pricing an asset or liability. Additionally, it establishes a
fair value hierarchy that prioritizes the information used to
develop those assumptions. We have not yet determined the impact
that the implementation of SFAS No. 157 will have on
our results of operations or financial condition.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
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In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R). This standard requires employers to recognize
the underfunded or overfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in the funded status
in the year in which the changes occur through accumulated other
comprehensive income. Additionally, SFAS No. 158
requires employers to measure the funded status of a plan as of
the date of its year-end statement of financial position. We are
currently evaluating the impact that the implementation of
SFAS No. 158 will have on our financial statements.
The new reporting requirements and related new footnote
disclosure rules of SFAS No. 158 are effective for
fiscal years ending after December 15, 2006. The new
measurement date requirement applies for fiscal years ending
after November 15, 2008. We have determined that this
statement is not applicable to the company.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements, (SAB 108). SAB 108 was issued to
provide interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying in a current year misstatement. The
provisions of SAB 108 were effective for the company for
its December 31, 2006 year-end. The adoption of
SAB 108 had no impact on our consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Liabilities which we refer to as
SFAS No. 159. SFAS No. 159 provides
companies with an option to report selected financial assets and
liabilities at fair value, and establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities. The new guidance is
effective for fiscal years beginning after November 15,
2007. We are currently evaluating the potential impact of the
adoption of SFAS No. 159 on its financial position and
results of operations.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Sensitivity
At February 28, 2007, we were exposed to interest rate risk
primarily through borrowings under our revolving credit facility
because our borrowings are subject to variable interest rates.
We had outstanding $94.5 million under our revolving credit
facility. In the event that interest rates associated with the
revolving credit facility were to increase by 100 basis points
the impact on future cash flows would be a decrease of
$0.94 million.
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, 2006, 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.
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BUSINESS
Overview
Compass Diversified Trust offers investors an opportunity to
participate in the ownership and growth of middle market
businesses that traditionally have been owned and managed by
private equity firms or other financial investors, large
conglomerates or private individuals or families. Through the
ownership of a diversified group of middle market businesses, we
also offer investors an opportunity to diversify their portfolio
risk while participating in the cash flows of our businesses
through the receipt of quarterly distributions.
We acquire and manage middle market businesses based in North
America with annual cash flows between $5 million and
$40 million. We seek to acquire controlling ownership
interests in the businesses in order to maximize our ability to
work actively with the management teams of those businesses. Our
model for creating shareholder value is to be disciplined in
identifying and valuing businesses, to work closely with
management of the businesses we acquire to grow the cash flows
of those businesses, and to exit opportunistically businesses
when we believe that doing so will maximize returns. We
currently own six businesses in six distinct industries and we
believe that these businesses will continue to produce stable
and growing cash flows over the long term, enabling us to meet
our objectives of growing distributions to our shareholders,
independent of any incremental acquisitions we may make, and
investing in the long-term growth of the company.
In identifying acquisition candidates, we target businesses that:
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produce stable cash flows;
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have strong management teams largely in place;
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maintain defensible positions in industries with forecasted
long-term macroeconomic growth; and
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face minimal threat of technological or competitive obsolescence.
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We maintain a long-term ownership outlook which we believe
provides us the opportunity to develop more comprehensive
strategies for the growth of our businesses through various
market cycles, and will decrease the possibility, often faced by
private equity firms or other financial investors, that our
businesses will be sold at unfavorable points in a market cycle.
Furthermore, we provide the financing for both the debt and
equity in our acquisitions, which allows us to pursue growth
investments, such as add-on acquisitions, that might otherwise
be restricted by the requirements of a third-party lender. We
have also found sellers to be attracted to our ability to
provide both debt and equity financing for the consummation of
acquisitions, enhancing the prospect of confidentiality and
certainty of consummating these transactions. In addition, we
believe that our ability to be long-term owners alleviates the
concern that many private company owners have with regard to
their businesses going through multiple sale processes in a
short period of time and the disruption that this may create for
their employees or customers.
We believe that our ownership outlook provides us the
opportunity to develop more comprehensive strategies for the
medium and long term growth of our businesses in and out of
market cycles, and decreases the possibility that our businesses
will be sold at unfavorable points in a market cycle.
Furthermore, our financing of both the debt and equity of our
businesses allows us to pursue interesting growth opportunities,
such as add-on acquisitions, that might otherwise be restricted
by the presence of a third-party lender.
We have a strong management team that has worked together since
1998 and, collectively, has approximately 75 years of
experience in acquiring and managing middle market businesses.
During that time, our management team has developed a reputation
for acquiring middle market businesses in various industries
through a variety of processes. These include corporate
spin-offs, transitions of family-owned businesses, management
buy-outs, management based
roll-ups,
reorganizations, bankruptcy sales and auction-based acquisitions
from financial owners. The flexibility, creativity, experience
and expertise of our management team in structuring complex
transactions provides us with strategic advantages by allowing
us to consider non-traditional and complex transactions tailored
to fit specific acquisition targets.
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Our manager, who we describe below, has demonstrated a history
of growing cash flows at the businesses in which it has been
involved. As an example, for the four businesses we acquired
concurrent with the IPO, 2006 full year operating income
increased, in total, over 2005 by 20.5%. Our quarterly
distribution rate has increased by 14.3% from the IPO, which we
refer to as the IPO, on May 16, 2006 until January 2007,
from $0.2625 per share to $0.30 per share. From the date of the
IPO until December 31, 2006 (including the distribution
paid in January 2007 for the quarter ended December 31,
2006), our distribution coverage ratio (estimated cash available
for distribution divided by total distributions) was 1.7x. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
At the time of the IPO, on May 16, 2006, we sold
13,500,000 shares of the trust at an offering price of
$15.00 per share. Total net proceeds from the IPO were
approximately $188.3 million. On May 16, 2006, we also
completed, on the same terms of the IPO, 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 owned by our
management team, for approximately $4.0 million. CGI also
purchased 666,667 shares for $10.0 million through the
IPO. In addition, in connection with the acquisition of Anodyne
on August 1, 2006, we issued 950,000 of our newly issued
shares to CGI valued at $13.1 million, or $13.77 per share.
Since the commencement of the IPO, we have acquired controlling
interests in the following businesses (including Crosman which
we recently divested):
Advanced
Circuits
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in Advanced Circuits. Advanced Circuits,
headquartered in Aurora, Colorado, is a provider of prototype
and quick-turn 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.
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
rather than on other factors, such as price. Advanced Circuits
meets this market need by manufacturing and delivering custom
PCBs in as little as 24 hours, providing its approximately 8,000
customers with approximately 98% error-free production and
real-time customer service and product tracking 24 hours per
day. Advanced Circuits had full-year operating income of
approximately $11.6 million for the year ended
December 31, 2006.
Aeroglide
On February 28, 2007, we acquired a controlling interest in
Aeroglide. Aeroglide, headquartered in Cary, North Carolina, is
a leading global designer and manufacturer of industrial drying
and cooling equipment. Aeroglide provides specialized thermal
processing equipment designed to remove moisture and heat as
well as roast, toast and bake a variety of processed products.
Its machinery includes conveyer driers and coolers, impingement
driers, drum driers, rotary driers, toasters, spin cookers and
coolers, truck and tray driers and related auxiliary equipment
and is used in the production of a variety of human foods,
animal and pet feeds and industrial products. Aeroglide utilizes
an extensive engineering department to custom engineer each
machine for a particular application. Aeroglide had full-year
operating income of approximately $3.1 million for the year
ended December 31, 2006.
Anodyne
On August 1, 2007, we acquired a controlling interest in
Anodyne on August 1, 2006. Anodyne, headquartered in Los
Angeles, California, is a leading manufacturer of medical
support services and patient positioning devices used primarily
for the prevention and treatment of pressure wounds experienced
by patients with limited or no mobility. Anodyne is one of the
nations leading designers and manufacturers of specialty
support surfaces and is able to manufacture products in multiple
locations to better serve a national customer base. Anodyne had
operating income of approximately $0.3 million for the ten
and one-half month period ended December 31, 2006.
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CBS
Personnel
On May 16, 2006, concurrent with out IPO, we acquired a
controlling interest in CBS Personnel. CBS Personnel,
headquartered in Cincinnati, Ohio, is a provider of temporary
staffing services in the United States. In order to provide its
4,000 clients with tailored staffing services to fulfill their
human resources needs, CBS Personnel also offers employee
leasing services, permanent staffing and temporary-to-permanent
placement services. CBS Personnel operates 144 branch locations
in various cities in 18 states. CBS Personnel had full-year
operating income of approximately $21.1 million for the
year ended December 31, 2006.
Crosman
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in Crosman Acquisition Corporation, which
we refer to as Crosman. Crosman, headquartered in East
Bloomfield, New York, was one of the first manufacturers of
airguns and is a manufacturer and distributor of recreational
airgun products and related products and accessories. The
Crosman brand is one of the pre-eminent names in the
recreational airgun market and is widely recognized in the
broader outdoor sporting goods industry. Crosmans products
are sold in over 6,000 retail locations worldwide through
approximately 500 retailers, which include mass market and
sporting goods retailers. On January 5, 2007, we sold
Crosman on the basis of a total enterprise value of
approximately $143 million. We have reflected Crosman as a
discontinued operation for all periods presented in this
prospectus. For further information, see Note D
Discontinued Operations, to our consolidated
financial statements included elsewhere in this prospectus.
Crosman had full-year operating income of approximately
$17.6 million for the year ended December 31, 2006.
Halo
On February 28, 2007, we acquired a controlling interest in
Halo, and which operates under the brand names of Halo and Lee
Wayne. Halo, headquartered in Sterling, Illinois, serves as a
one-stop shop for over 30,000 customers, providing design,
sourcing, management and fulfillment services across all
categories of its customers 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 700 account executives. Halo had
full-year operating income of approximately $6.1 million
for the year ended December 31, 2006.
Silvue
On May 16, 2006, concurrent with the IPO, we acquired a
controlling interest in Silvue. Silvue, headquartered in
Anaheim, California, is a developer and producer of proprietary,
high performance liquid coating systems used in the high-end
eyewear, aerospace, automotive and industrial markets.
Silvues patented coating systems can be applied to a wide
variety of materials, including plastics, such as polycarbonate
and acrylic, glass, metals and other surfaces. These coating
systems impart properties, such as abrasion resistance, improved
durability, chemical resistance, ultraviolet or UV protection,
anti-fog and impact resistance, to the materials to which they
are applied. Silvue has sales and distribution operations in the
United States, Europe and Asia, as well as manufacturing
operations in the United States and Asia. Silvue had full-year
operating income of approximately $6.7 million for the year
ended December 31, 2006.
Our
Manager
We have entered into a management services agreement with
Compass Group Management LLC, who we refer to as our manager or
CGM, 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. While working for a
subsidiary of Compass Group Investments, Inc., which we refer to
as CGI, our management team originally oversaw the acquisition
and operations of each of our initial businesses and Anodyne
prior to our acquiring them from CGI.
We pay our manager a quarterly management fee equal to 0.5%
(2.0% annualized) of our adjusted net assets as of the last day
of each fiscal quarter for the services it performs on our
behalf. In addition, our manager is entitled to receive a profit
allocation upon the occurrence of certain trigger events and has
the
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right to cause the company to purchase the allocation interests
that it owns upon termination of the management services
agreement. See Our Manager Our Relationship
with our Manager and Supplemental Put
Agreement and Certain Relationships and Related
Party Transactions for further descriptions of the
management fees and profit allocation and our managers
supplemental put right.
The companys 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
companys 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 100% of their time to the affairs of the
company. See Our Manager Our Relationship with
our Manager and Certain Relationships and Related Party
Transactions.
Market
Opportunity
We believe that the merger and acquisition market for middle
market businesses is highly fragmented and provides
opportunities to purchase businesses at attractive prices. For
example, according to Mergerstat, during the twelve month period
ended December 31, 2006, businesses that sold for less than
$100 million were sold for a median of approximately 7.9x
the trailing twelve months of earnings before interest, taxes,
depreciation and amortization as compared to a median of
approximately 9.3x for businesses that were sold for between
$100 million and $300 million and 11.7x for businesses
that were sold for over $300 million. We expect to acquire
companies in the first two categories described above, and our
manager has, to date, typically been successful in consummating
attractive acquisitions at multiples at or below 7x the trailing
twelve months of earnings before interest, taxes, depreciation
and amortization, both on behalf of the company and prior to our
formation while working for a subsidiary of CGI. We believe that
among the factors contributing to lower acquisition multiples
for businesses of the size we target are the fact that sellers
of these frequently consider non-economic factors, such as
continuing board membership or the effect of the sale on their
employees and customers and that these businesses are less
frequently sold pursuant to an auction process.
Our management teams strong relationship with business
brokers, investment and commercial bankers, accountants,
attorneys and other potential sources of acquisition
opportunities offers us substantial opportunities to purchase
middle market businesses.
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 improve the operating performance of these
businesses by augmenting the management teams, enhancing the
financial reporting and management information systems and/or
bolstering corporate development efforts to help these
businesses pursue organic or external growth strategies.
Our
Strategy
In seeking to maximize shareholder value, we focus on the
acquisition of new platforms and the management of our existing
businesses (including acquisition of add-on businesses by those
existing businesses). While we continue to identify, perform due
diligence on, negotiate and consummate additional platform
acquisitions of attractive middle market businesses that meet
our acquisition criteria, we believe that our current businesses
alone will allow us to pay and grow distributions to our
shareholders.
Acquisition
Strategy
Our strategy for new platforms involves the acquisition of
businesses that we expect to be accretive to our cash flow
available for distribution. An ideal acquisition candidate for
us is a North American company which demonstrates a reason
to exist, that is, it is a leading player in its market
niches, has predictable and growing cash flows, operates in an
industry with long-term macroeconomic growth and has a strong
and
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incentivizable management team. We believe that attractive
opportunities to make such acquisitions will continue to present
themselves, as private sector owners seek to monetize their
interests and large corporate parents seek to dispose of their
non-core operations. We benefit from our managers ability
to identify potential diverse acquisition opportunities in a
variety of industries. In addition, we rely upon our management
teams experience and expertise in researching and valuing
prospective target businesses, as well as negotiating the
ultimate acquisition of such target businesses.
Management
Strategy
Our management strategy involves our active financial and
operational management of our businesses in order to improve
financial and operational efficiencies and achieve appropriate
growth rates. After acquiring a controlling interest in a new
business, we rely on our management teams experience and
expertise to work efficiently and effectively with the
management of the new business to jointly develop and execute a
business plan and to manage the business consistent with our
management strategy. In addition, we expect to sell businesses
that we own from time to time when attractive opportunities
arise. Our decision to sell a business is based on our belief
that doing so will increase shareholder value to a greater
extent than would continued ownership of that business. Our sale
of Crosman is an example of our ability to successfully execute
this strategy. With respect to the sale of Crosman, we
recognized a gain of $35.9 million, having owned Crosman
for under eight months and having earned operating income
of $13.3 million through December 31, 2006.
In general, our manager oversees and supports the management
teams of each of our businesses by, among other things:
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recruiting and retaining talented managers to operate our
businesses by using structured incentive compensation and equity
ownership programs tailored to each business;
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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;
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assisting management in their analysis and pursuit of prudent
organic growth strategies, potentially involving
capacity-related capital expenditures, introduction of new
products or services, or expansion of sales or marketing
programs; and
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forming strong subsidiary level boards of directors to
supplement management in their development and implementation of
strategic goals and objectives.
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A critical component of our management strategy involves the
acquisition and integration of add-on businesses. Acquisitions
of add-on businesses can be an effective way of improving
financial and operational performance by allowing us to:
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leverage manufacturing and distribution operations;
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capitalize on existing branding and marketing programs, as well
as customer relationships;
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increase market share and penetrate new markets;
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realize cost synergies, effectively reducing the multiple paid
for the add-on acquisition target; and
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add experienced management or management expertise;
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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 or
to acquire additional businesses. We believe this financing
structure is beneficial to the financial and operational
activities of each of our businesses by allowing our businesses
to have maximum flexibility in pursuing opportunities for
growth, whether organically or through acquisitions.
As a final component of our management strategy, we expect to
sell businesses that we own from time to time when attractive
opportunities arise. Our decision to sell a business is based on
our belief that doing so will increase shareholder value to a
greater extent than through continued ownership of that
business.
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Through the sale process, we work with third party service
providers to identify appropriate buyers, maximize valuation and
optimize terms to us as sellers.
Strategic
Advantages
Based on the experience of our management team and its ability
to identify and negotiate acquisitions, we believe we are
positioned to acquire, on favorable terms, additional businesses
that will increase our cash flows. Our management team has
strong relationships with thousands of accountants, attorneys,
business brokers, commercial and investment bankers and other
potential sources of acquisition opportunities which it has
cultivated over the years, and which it maintains through
consistent contact. Through this network, as well as our
management teams proprietary transaction sourcing efforts,
we have a substantial pipeline of potential acquisition targets.
In addition, our management team, both while working for our
manager and while working with a subsidiary of CGI prior to our
formation, has a successful track record of and a reputation for
acquiring middle market businesses in various industries through
a variety of processes. These include, in some cases on behalf
of CGI prior to our formation, corporate spin-offs (Silvue),
transitions of family-owned businesses (CBS Personnel and
Aeroglide), management buy-outs (ACI), management based
roll-ups
(Anodyne), auction-based acquisitions from financial owners
(Halo), reorganizations and bankruptcy sales. The flexibility,
creativity, experience and expertise of our management team in
structuring complex transactions provides us with strategic
advantages by allowing us to consider non-traditional and
complex transactions tailored to fit specific acquisition
targets.
Finally, because our model is to fund both the equity and debt
required to consummate acquisitions through the utilization of
our revolving credit facility, we expect to eliminate the
cumbersome delays and closing conditions that are 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 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, our management team evaluates
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 perform valuations using a variety of analyses, including
discounted cash flow analyses, development of expected value
matrices, and evaluation of comparable trading and transaction
values.
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 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.
A 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
upon acquisition, 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 upon acquisition, we
enhance and improve those existing systems that are deemed to be
inadequate or insufficient to support our business plan for the
target business. In both of these cases, ownership of a
controlling interest in these businesses is an important factor
in implementing necessary changes.
78
Financing
We intend to finance future acquisitions first, through excess
cash on hand; second, through our revolving credit facility; and
third, as necessary, from additional equity or debt financings.
Cash flow available for distribution that is not utilized to pay
distributions to our shareholders is either added to cash on
hand or used to repay amounts owed under the revolving credit
facility, increasing availability under that facility. In this
way, this excess cash available for distribution is ultimately
reinvested in the long-term growth of the Company.
We believe that having the ability to finance an entire
transaction ourselves, rather than through transaction-specific
third-party financing, provides us with an important and unusual
strategic advantage in acquiring attractive businesses by
enabling us to eliminate the delay and closing conditions
inherent to transaction-specific financings. We further believe
that being both the lender to and controlling equity owner of
our businesses provides those businesses with the flexibility
required to pursue interesting growth opportunities both
organically and externally, as well as provides us with the
maximum security and ability to mitigate risk in the case of
industry or company underperformance.
We have a revolving credit facility with a group of lenders led
by Madison. The revolving credit facility was entered into in
November 2006 and matures in November 2011. It provides for a
revolving line of credit of up to $255 million with an
option for a $45 million increase. The revolving credit
facility is secured by all the assets of the company including
all its equity interests in and loans to our subsidiaries. As of
February 28, 2007, we had $94.5 million outstanding
under our revolving credit facility. Amounts outstanding under
our revolving credit facility 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 companys 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 companys
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. Simultaneous with
entering into the revolving credit facility on November 21,
2006, we terminated our prior financing arrangement, a
$225 million secured credit facility with Ableco Finance,
LLC and other lenders.
Corporate
Information
Compass Diversified Trust is a Delaware statutory trust formed
on November 18, 2005. Compass Group Diversified Holdings
LLC is a Delaware limited liability company formed on
November 18, 2005. Our principal executive offices are
located at Sixty One Wilton Road, Second Floor, Westport,
Connecticut 06880, and our telephone number is
203-221-1703.
Our website is at www.CompassDiversifiedTrust.com. The
information on our website is not incorporated by reference and
is not part of this prospectus.
Our
Businesses
Advanced
Circuits
Overview
Advanced Circuits, headquartered in Aurora, Colorado, is a
provider of prototype and quick-turn printed circuit boards, or
PCBs, throughout the United States. Advanced Circuits also
provides its customers high volume production services in order
to meet its clients 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
approximately
79
98% error-free production and real-time customer service and
product tracking 24 hours per day. In 2006, 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
8,000 customers with which it does business throughout the year.
These customers represent numerous end markets, and for the year
ended December 31, 2006, 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.
Concurrent with the IPO, we made loans to and purchased a
controlling interest in Advanced Circuits totaling
$81.0 million. Our controlling interest represents
approximately 70.2% of the outstanding stock of Advanced
Circuits on a primary and fully diluted basis. For the fiscal
year ended December 31, 2006 and December 31, 2005,
Advanced Circuits had net sales of approximately
$48.1 million and $42.0 million, respectively. Since
May 16, 2006, the date of our acquisition, through
December 31, 2006. Advanced Circuits had revenues of
$30.6 million and operating income of $7.5 million.
Advanced Circuits had total assets of $77.9 million at
December 31, 2006. Revenues from Advanced Circuits
represented 7.4% of our total revenues for 2006.
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. In
this respect, 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%.
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 the World
Electronic Circuits Councils WECC Global/PCB
Production Report 2005 Baseline Data, total
PCB production in 2005 is estimated to be over
$42.4 billion.
In contrast to global trends, however, production of PCBs in
North America has declined by approximately 55% since 2000, to
approximately $4.7 billion in 2005, and is expected to grow
slightly over the next several years according to the Executive
Market Technology Forum A Business Intelligence
Program for IPC Members which we refer to as EMTF, survey:
Analysis of the North American Rigid Printed Circuit Board and
Related Materials Industries for the year 2005, which we refer
to as the EMTF 2005 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
80
market share gains in the PCB industry overall, both prototype
production and the more complex volume 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:
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Prototype PCBs These PCBs are
manufactured typically 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.
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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 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.
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Volume Production PCBs These PCBs are
used in the full scale production of electronic equipment and
specifications conform strictly to end product requirements.
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 $1.7 billion in
the PCB production industry according to the EMTF 2005 Analysis.
Several significant trends are present within the PCB
manufacturing industry, including:
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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 on 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.
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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.
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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
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81
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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 offshoring 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.
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Products
and Services
A PCB is comprised of layers of laminate and contains patterns
of electrical circuitry to connect electronic components.
Advanced Circuits 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 PCBs 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. 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 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.
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 the PCB design verification stage using its
unique online FreeDFM.com tool.
FreeDFM.comTM,
which was launched in 2002, enables customers to receive a free
manufacturability assessment report within minutes, indicating
whether Advanced Circuits has the files and data necessary to
build the job 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.
Advanced Circuits manufactures all high margin prototype 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.
Advanced Circuits has 11 external partners, some with multiple
production facilities. 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.
82
The following table shows Advanced Circuits gross revenue
by products and services for the periods indicated:
Gross
Sales by Products and Services(1)
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December 31, 2006
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December 31, 2005
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Prototype Production
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33.4
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%
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34.0
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%
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Quick-Turn Production
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32.1
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%
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32.0
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%
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Volume Production
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20.4
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%
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20.1
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%
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Third Party
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14.1
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%
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13.9
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%
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Total
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100.0
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%
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100.0
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%
|
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|
|
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|
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|
|
|
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(1) |
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As a percentage of gross sales, exclusive of sale discounts. |
Competitive
Strengths
Advanced Circuits has established itself as a 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:
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Numerous Unique Orders Per Day For the
year ended December 31, 2006, Advanced Circuits received an
average of over 290 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
significantly 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 to maximize 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 are 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.
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Diverse Customer Base Advanced
Circuits possesses a customer base with little industry or
customer concentration exposure. During fiscal year ended
December 31, 2006, Advanced Circuits did business with over
8,000 customers and added approximately 225 new customers per
month. Advanced Circuits website receives thousands of
hits per day and, each month during 2005, it received
approximately 600 requests to establish new web accounts. For
the year ended December 31, 2006, no customer represented
over 2% of net sales.
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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 customers product within 24 hours of
receiving its order.
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Proprietary
FreeDFM.comTM
Software Advanced Circuits offers its
customers unique design verification services through its online
FreeDFM.comTM
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.comTM
has the added benefit of improving the efficiency of Advanced
Circuits engineers, as many routine design problems, which
typically require an engineers time and attention to
identify, are identified and sent back to customers
automatically.
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83
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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 full 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.
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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:
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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 its 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 cost 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.
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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, management
believes that 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 Fabfile online, in 2006
there were over 400 small PCB manufacturers with annual sales of
under $10 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 is beginning to seize upon a significant 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.
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Remain Committed to Customers and
Employees Over its history, Advanced
Circuits has remained focused on providing the highest quality
product and service to its customers. Management believes 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.
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84
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 Circuits
expects to maintain and build upon the competitive strengths
from which it benefits currently.
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. For the year ended
December 31, 2006, no single customer accounted for more
than 2% of net sales. The following table sets forth
managements estimate of Advanced Circuits
approximate customer breakdown by industry sector for the fiscal
year ended December 31, 2006:
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2006 Customer
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Industry Sector
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Distribution
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Electrical Equipment and Components
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40
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%
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Measuring Instruments
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|
15
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%
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Electronics Manufacturing Services
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11
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%
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Engineer Services
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5
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%
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Industrial and Commercial Machinery
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|
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5
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%
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Business Services
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5
|
%
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Wholesale Trade-Durable Goods
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|
|
3
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%
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Educational Institutions
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|
|
2
|
%
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Transportation Equipment
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|
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5
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%
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All Other Sectors Combined
|
|
|
9
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%
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|
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Total
|
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100
|
%
|
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Management estimates that over 70% of all Advanced
Circuits orders are new, first time designs and
approximately 90% of orders are generated from existing
customers. Moreover, approximately 65% of Advanced
Circuits orders are derived from orders 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. Advanced Circuits spends approximately 2% of net sales
each year on its marketing initiatives and has 20 people
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 between 200 and 300 outbound sales calls and
receive between 160 and 220 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. Many other customers
are acquired over the internet where Advanced Circuits generates
approximately 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 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 postage pre-paid
bounce-back card on which a customer can
85
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.
Competition
There are currently an estimated 460 active domestic PCB
manufacturers. Advanced Circuits competitors differ among
its products and services.
Competitors in the prototype and quick-turn PCBs production
industry include generally large 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 Merix Corporation. 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 offshoring 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 firms 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 of under
$10 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 17 years, 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 13.3% of net sales for the
fiscal year ended December 31, 2006.
The primary raw materials that are used in production are core
materials, such as copper clad layers of glass and chemical
solutions, such as 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, has recently experienced a significant increase in
price, the impact on its cost of sales was minimal as the
increase accounted for only a 0.5% increase in cost of sales as
a percentage of net sales. Further, as price is not the primary
factor affecting the purchase decision of many of Advanced
Circuits customers, management has historically passed
along a portion of raw material price increases to its customers.
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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 workforces expertise 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 have significant
value and are material to Advanced Circuits business.
Regulatory
Environment
In light of Advanced Circuits manufacturing 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. 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.
Employees
As of December 31, 2006, Advanced Circuits employed
approximately 200 persons. Of these employees, there were 22 in
sales and marketing, 5 in information technology, 9 in
accounting and finance, 30 in engineering, 14 in shipping and
maintenance, 115 in production and 5 in management. None of
Advanced Circuits employees are subject to collective
bargaining agreements. Advanced Circuits believes its
relationship with its employees is good.
Aeroglide
Overview
Aeroglide, headquartered in Cary, North Carolina, is a leading
global designer and manufacturer of industrial drying and
cooling equipment. Aeroglides machinery is used in the
production of a variety of human foods, animal and pet feeds and
industrial products. On February 28, 2007, we made loans to
and purchased a controlling interest in Aeroglide totaling
$57 million. Our controlling interest represents
approximately 89% of the stock of Aeroglide on a fully diluted
basis. Aeroglide had revenues of $48.1 million and
operating income of $3.1 million for the full-year ended
December 31, 2006.
Aeroglide produces specialized thermal processing equipment
designed to remove moisture and heat from, as well as roast,
toast and bake, a variety of processed products. These lines
include conveyor driers and coolers, impingement driers, drum
driers, rotary driers, toasters, spin cookers and coolers, truck
and tray driers, and related auxiliary equipment. Aeroglide is
an original equipment manufacturer fabricating its equipment in
carbon or stainless steel and providing training, aftermarket
components, and field service. Aeroglide utilizes an extensive
engineering department to custom engineer each machine for a
particular application.
History
of Aeroglide
Aeroglide was founded in 1940 as a designer and manufacturer of
potato packing house equipment. Within ten years of inception,
Aeroglides focus had shifted to tower driers used for
grain processing. From
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the 1950s through the 1970s, grain driers were the dominant
product line, and Aeroglide was well known by major grain
processors such as ADM, Bunge, and Cargill.
Through in-house development and acquisitions during the late
1960s, Aeroglide began to market conveyor driers and rotary
driers. While initially overshadowed by tower units, conveyor
driers began to emerge as the most promising future opportunity
for Aeroglide in the 1980s and have since become
Aeroglides dominant product line.
In the early 1990s, a newly installed management team
implemented a series of strategic initiatives intended to
capitalize on the inherent value of Aeroglides thermal
processing capabilities in the areas of drying and cooling. As a
result, Aeroglide began to exit activities and products that did
not reinforce its heat transfer expertise. As part of this
strategic repositioning, Aeroglide sold a Florida subsidiary
that had been purchased in 1965. Additionally, in recognition of
the Aeroglides global sales opportunity, management
proactively began to develop international markets through
direct foreign sales representatives. As international sales
volumes increased over time, Aeroglide added foreign offices in
the United Kingdom (1996), Malaysia (2002), and China (2006).
As sales momentum began to build in the late 1990s, Aeroglide
focused on new product development and add-on acquisitions as
future growth opportunities. Aeroglides talented in-house
development team produced several new products, including a
toaster and an impingement drier. Aeroglide subsequently
acquired Food Engineering Corporation, which we refer to as FEC,
in 2002, and National in 2004, adding lines of drum driers and a
greater breadth of impingement drier capabilities through the
latter acquisition.
Industry
Aeroglide provides equipment and aftermarket services to
processing customers across three primary markets: human food,
animal feed, and diversified industrial products. Within the
food processing industry, Aeroglide provides equipment to
manufacturers in the ready to eat cereal, snack food, fruit and
vegetable, cookie, cracker and pasta, and other segments. Within
the animal feed market, Aeroglide supplies machinery to
end-users across the industrys two primary segments, pet
food and aquaculture feed ingredients. In the industrial
sectors, Aeroglides primary customer base consists of
manufacturers of chemicals, polymers, nonwovens/fibers,
charcoal, and a variety of other specialized industrial products.
Food Processing: The food processing
industry consists of grain and oil seed milling, sugar and
confectionary product manufacturing, fruit and vegetable
processing, specialty food manufacturing, dairy product
manufacturing, seafood preparation and packaging, and baked
goods manufacturing. A large and non-cyclical market, the food
processing industry consists of many large multinational
corporations and thousands of smaller-scale local and regional
manufacturers.
Feed Processing: The processing of
animal feed is very similar to the production of many human
foods and utilizes a range of common equipment. The feed
processing industry consists of two
sub-segments:
dog and cat food; and animal feed. The dog and cat food
manufacturing industry focuses on the processing of grains,
oilseed mill products, and meats into common pet food. The
animal feed manufacturing industry includes all other forms of
animal food, such as livestock feed, poultry feed, and
aquaculture feed.
Industrial Processing: The sector is
broadly defined to capture a variety of processed products.
Aeroglide defines its participation to the following categories:
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Chemicals The chemicals segment
includes catalyst/clay products and pigment manufacturers.
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Polymers The polymers segment includes
absorbent gels and synthetic rubber manufacturers.
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Non-Wovens/Fibers The
non-wovens/fibers segment includes filter, non-woven, and
synthetic fiber manufacturers.
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Charcoal The charcoal segment includes
charcoal and coal processors and manufacturers.
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Other Industrial The other industrial
segment includes minerals, metals, waste, recycling,
pharmaceuticals, plastics, tobacco, and wood processors and
manufacturers.
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Products
and Services
Aeroglides capital equipment sales include conveyor driers
and coolers, impingement driers, drum driers, rotary driers,
toasters, spin cookers and coolers, truck and tray driers, and
related auxiliary equipment. To complement its capital equipment
sales, Aeroglide has grown its aftermarket service offering.
Aeroglides aftermarket business focuses on processing line
expansions, equipment retrofits and refurbishments, spare parts
and general maintenance needs.
Conveyor Driers: Conveyor driers
generally account for a large portion of Aeroglides
capital equipment sales and address the widest range of end-use
applications. Employed across all of the Aeroglides
primary served markets (e.g., food, feed and industrial), the
conveyor drier transports a given product through a large
tunnel, where airflow initially delivers heat to the product and
then serves as the medium to discharge moisture from the process
chamber. Aeroglide offers single-pass, multi-pass, and
multi-stage conveyor driers in a broad array of configurations.
A typical conveyor drier is 10 feet wide, 40 feet long, and
15 feet high. However, the size, bed configuration, and thermal
processing capabilities of a conveyor drier are ultimately
determined by the specific product application and the
customers facility space. Conveyor driers are available in
fully assembled modules (to minimize installation time) or in
knock-down form (to minimize transportation and installation
costs, particularly overseas). The typical selling price for a
conveyor drier ranges from $200,000 to $1.5 million.
Impingement Driers: Aeroglide
impingement driers use air pressure to hold and/or agitate
products during processing. Ideal for smaller products such as
pharmaceuticals and snack foods, impingement driers are
primarily applicable across an array of food and industrial
product processes. The typical selling price for an impingement
drier ranges from $500,000 to $2.0 million.
Rotary Driers: Aeroglide rotary driers
are utilized in a variety of high-volume processing applications
across Aeroglides three primary served markets. Used to
efficiently dry high-moisture products capable of tolerating
vigorous agitation (including pet food, aquaculture feed,
grains, chemicals, and wood products), rotary driers have been
offered by Aeroglide for nearly 40 years. The typical
selling price for a rotary drier ranges from $250,000 to
$750,000.
Toasters: Aeroglides
AeroFlowTM
line of toasters offers an effective and expedited processing
solution for a variety of human foods. Relative to driers,
toasters operate at higher temperatures and higher airflow
velocities and are predominantly used in the ready to eat cereal
market. The
AeroFlowTM
line offers faster cycle times and can be used for a range
drying, toasting, roasting, and cooling applications. The
typical selling price for a toaster ranges from $300,000 to
$700,000.
Pulsed Fluid Bed Driers: Introduced in
2002, Aeroglides pulsed fluid bed driers are one of
Aeroglides newest product lines. Aeroglide holds an
exclusive license from the Canadian government for the product
lines underlying technology, which offers a unique
improvement over conventional fluid bed drying methods. Marketed
under the
AeroPulseTM
brand name, this technology provides high thermal efficiency
while using significantly less air than conventional fluid bed
systems. Primarily incorporated in food and pharmaceutical
processing applications, the new pulsed-air fluid bed drier
technology represents a relatively untapped growth opportunity
for Aeroglide. The typical selling price for a pulsed fluid bed
drier ranges from $200,000 to $600,000.
Aftermarket Services: Aeroglides
aftermarket service offering includes mechanical redesign
services related to customers line expansions and
equipment refurbishments in addition to customized and standard
replacement parts programs. Aeroglide also offers evaluative
field engineering services designed to assist customers in
maximizing drying equipment efficiency. Collectively, these
services afford Aeroglide multiple touch points with customers
between funded capital equipment projects and support
Aeroglides overall business strategy.
Aeroglides aftermarket service offering leverages
Aeroglides diverse mechanical design experience acquired
through decades of working
side-by-side
with customers to evaluate and resolve equipment-related
expansion and maintenance issues. The aftermarket services
provide an incremental opportunity to expand
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Aeroglides customer base, as such services are not
exclusive to Aeroglides estimated installed equipment base.
Aeroglides field engineering and drier evaluation services
are offered to operators of industrial process driers to assist
in optimizing the performance of installed equipment.
Aeroglides worldwide field engineering staff has extensive
experience in identifying and evaluating both immediate and
longer-term drier performance improvement opportunities.
Aeroglides expertise extends to all makes, models, and
vintages of driers across a wide variety of products and
processes.
Competition
Aeroglide is the largest global designer and manufacturer of
industrial drying and cooling process equipment in the world,
primarily competing within a $300 million global market for
conveyor driers and coolers. An estimated 50 drier and cooler
manufacturers participate in the worldwide market. However, due
to the fragmented nature of the industry, Aeroglide competes
most directly with a handful of suppliers. Growth within the
broader industry and, by extension, Aeroglides served
market, is driven by manufacturing sector expansion, capacity
utilization, and capital investments in machinery and equipment.
Manufacturers of conveyor driers and coolers compete based on a
common set of criteria that includes the following factors:
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Reliability Since many driers and
coolers are operated continuously over a 10 year to
20 year period, customers are heavily focused on equipment
reliability. Many processors are, therefore, willing to pay a
premium for higher quality, more reliable equipment to mitigate
the cost and inconvenience of unscheduled maintenance.
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Process Knowledge Design parameters
for drying and cooling equipment include incoming and outgoing
moisture levels, heat sensitivity, airflow requirements, and
necessary retention times. As a result, manufacturers with
significant thermal processing knowledge are usually
differentiated in the marketplace. This is particularly
important in the food and feed processing segments, where
moisture uniformity failures can have a significant impact on a
customers corporate image and profitability.
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Time to Delivery Typical times to
delivery for Aeroglides products range from 18 weeks
to 24 weeks from the order date. Given these lead times,
customers typically seek suppliers who are most capable of
delivering equipment on schedule.
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Energy Efficiency Depending on the
application, drying and cooling equipment can consume a
significant amount of energy. Accordingly, a more efficient
machine can provide processors with enormous
cost-of-ownership
savings over the life of the equipment.
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Sanitation Many processors use a
single conveyor or drier machine to produce multiple products.
As a result, ease of maintenance and cleaning becomes a critical
factor in the selection of an equipment manufacturer to minimize
cross-contamination. Effective machinery design can minimize
change-over times, thereby increasing overall equipment
productivity and value to the customer.
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Competitive
Strengths/Growth Opportunities
Experienced, Proactive Senior Management
Team: Aeroglides senior management
team, which has worked together since 1992, possesses over
75 years of collective tenure with Aeroglide. During the
1990s, the team proactively developed and implemented a plan
that has positioned Aeroglide for long-term growth and
profitability based on its core thermal processing expertise.
Proprietary Process Engineering
Expertise: Aeroglide maintains a broad base
of process engineering expertise that has been developed over
the past 66 years. Aeroglides technical expertise
enables Aeroglide customers to manufacture consumable products
in a more consistent and efficient manner than its competitors.
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Stable, Blue-Chip Customer
Base: Aeroglide maintains long-standing
relationships with many of the worlds most well-known
food, feed, and industrial processors. In each year since 2002,
60% to 90% of Aeroglides top-10 customers represented
repeat purchasers.
Outsourcing
Strategy
Aeroglide has developed a network of high-quality third-party
component manufacturers to augment in house manufacturing
capabilities. These third-party manufacturers provide production
flexibility, expanded capabilities and additional manufacturing
capacity. Aeroglides primary sourcing relationships are
local, yet it has established new outsourcing relationships in
China which it expects to develop and grow in the future.
Quality and delivery of all outsourced production is managed by
experienced Aeroglide personnel.
Proactive
Marketing of New and Redesigned Products
Management targeted new product development as a key growth
catalyst in the late 1990s, and Aeroglide has continued to
invest in this area over the past several years. Aeroglide is
looking to build upon recent success through proactive marketing
of its impingement driers, rotary driers, toasters, and drum
driers, and management expects strong organic growth from these
lines going forward.
Further
Penetration of the High-Growth China Market
China represents a significant and rapidly evolving growth
opportunity for Aeroglide, both with respect to its sales
potential and sourcing opportunities. Accordingly, Aeroglide is
aggressively positioning itself in the Chinese market. To
further capitalize on expected robust annual growth in the
Chinese industrial drier and cooler market, Aeroglide recently
opened its Shanghai office, which is supported by
Aeroglides office based in Malaysia.
Strategic
Acquisitions
There may be opportunity to capitalize on the fragmented nature
of the industrial drier and cooler market by proactively
pursuing acquisitions. Aeroglides prior acquisitions of
FEC and national demonstrate managements ability to
fulfill this growth strategy and have established Aeroglide as
the industrys natural consolidator.
Customers
Aeroglide has developed long-standing relationships with many
leading multinational processors of human food, animal feed, and
industrial products. Due to the project-oriented nature of the
business, it is common for the top customer list to vary from
year to year. However, in each year since 2002, 60% to 90% of
Aeroglides top ten customers represent repeat purchasers.
Over the past five years, Aeroglides top ten customers
have accounted for approximately 40% to 50% of total annual
sales.
Sales
and Marketing
Sales Strategy: Aeroglide possesses the
largest sales and marketing organization in the industrial
process drying and cooling industry. Aeroglides
integrated, highly technical outreach effort, which spans
Aeroglides applications engineering, service and
installation, product testing, and traditional capital equipment
and aftermarket sales departments, services current and
prospective customers from four branch offices (one domestic and
three international). Aeroglide approaches the market with a
value-added strategy, and management reinforces this message by
utilizing selected media advertising outlets and participating
in numerous annual industry trade shows around the world.
Aeroglide provides a high level of customer service,
product-specific knowledge, and customized technical expertise
through the depth of its team.
The nature of customers capital equipment purchasing
decisions results in a dynamic sales cycle. For long-time
customers with tightly defined thermal processing parameters, a
new equipment order can
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conclude in three months. For prospective customers with more
flexible processing requirements and rigorous internal approval
processes, the sales cycle can extend for up to 12 months.
On average, Aeroglides typical sales cycle is
6 months to 9 months in duration.
Facilities
Aeroglides Cary, North Carolina, facility serves as
Aeroglides corporate headquarters and primary
manufacturing location. Aeroglide performs all of its
administration, in-house production, design, and the vast
majority of its process engineering work at the Cary facility.
Aeroglide also leases a product testing laboratory facility and
storage space in the Cary area. The combined facilities in the
Cary area contain approximately 130,000 square feet and houses
Aeroglides capital equipment and aftermarket fabrication
and assembly functions. In addition, Aeroglide leases sales and
service facilities in Trevose, Pennsylvania; Stamford, England;
Shanghai, China; and Malaysia.
Legal
Proceedings
Aeroglide is, from time to time, involved in litigation and the
subject of various claims and complaints arising in the ordinary
course of business. In the opinion of Aeroglides
management, the ultimate disposition of these matters will not
have a material adverse effect on Aeroglides business,
results of operations and financial condition.
Employees
Aeroglide employs a non-unionized workforce of 205 full-time
employees. In addition, Aeroglide utilizes an experienced pool
of part-time direct laborers to satisfy increased production
demand.
Anodyne
Overview
Anodyne headquartered in Los Angeles, California, is a leading
manufacturer of medical support surfaces and patient positioning
devices used primarily for the prevention and treatment of
pressure wounds experienced by patients with limited or no
mobility.
On August 1, 2006 we made loans to and purchased a
controlling interest in Anodyne totaling $30.4 million,
approximately $17.3 million of which we paid in cash and
the remainder of which we paid by issuing 950,000 of our newly
issued shares at a price of $13.77 per share. Our controlling
interest represents approximately 47.3% of the outstanding
capital of Anodyne stock on a fully diluted basis and
approximately 69.8% of the voting power on a fully diluted basis.
For the full year ended December 31, 2006, Anodyne had net
sales of approximately $23.4 million and had operating
income of approximately $0.3 million. Since August 1,
2006, the date of our acquisition, Anodyne had revenues of
$12.2 million and an operating loss of approximately
$0.5 million. Anodyne had total assets of
$44.7 million at December 31, 2006. Revenues from
Anodyne, since our acquisition, represented approximately 3.0%
of our total revenues for the 2006 fiscal year.
History
of Anodyne
Anodyne was initially formed in early 2006 to acquire AMF and
SenTech, located in Corona, California and Coral Springs,
Florida, respectively. AMF was a leading manufacturer of powered
and static mattress replacement systems, mattress overlays,
seating cushions and patient positing devices. SenTech was a
leading designer and manufacturer of advanced electronically
controlled alternating pressure, low air loss and lateral
rotation specialty support surfaces for the wound care industry.
Prior to its acquisition, SenTech had established a premium
brand in the less price sensitive therapeutic market while AMF
competed in the more price sensitive preventive market.
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On October 5, 2006, Anodyne acquired the patient
positioning device business of Anatomic, for approximately
$8.6 million. In addition, acquisition costs totaling
$0.5 million were accrued in connection with the purchase
transaction. The acquired operations were merged into
Anodynes operations.
Industry
The medical support surfaces industry is fragmented in nature.
Management estimates the market is comprised of approximately 70
small participants who design and manufacture products for
preventing and treating decubitus ulcers. Decubitus ulcers, or
pressure ulcers, are formed on immobile medical patients through
continued pressure on one area of skin. Manufacturers of medical
support surfaces typically sell to one of several large medical
distribution companies who rent or sell the products to
hospitals, long-term care facilities and home health care
organizations.
Decubitus ulcers are caused by the placement of continuous
pressure on some point of skin for a prolonged period of time.
Immobility caused by injury, old age, chronic illness or obesity
are the main causes 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 a small portion 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. Contributing factors to the
development of pressure ulcers are sheer, or pull on the skin
due to the underlying fabric, and moisture, which increases
propensity to deteriorate.
The total U.S. market for specialty beds and medical support
surfaces was estimated to be $1.6 billion in 2005 and was
forecasted to reach $2.9 billion by 2012 (Frost and
Sullivan). Management believes the medical support surfaces
industry 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 have accounted
for 27% of the increase in health care spending between 1987 and
2001. As an individuals 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 individuals age skin becomes more
susceptible to breakdown increasing the likelihood of developing
pressure ulcers.
Beyond favorable demographic trends, Anodynes management
believes hospitals and other care providers are placing an
increased emphasis on the prevention of pressure ulcers. Frost
and Sullivan estimates that approximately 1 million
pressure ulcers occur annually in the United States generating
an estimated $1.3 billion in annual costs to hospitals
alone. According to Medicare reimbursement guidelines, pressure
ulcers are eligible for reimbursement by third party payers only
when they are diagnosed upon hospital admission. Additionally,
third party payers only provide reimbursement for preventative
mattresses under limited circumstances. 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, hospitals and other care providers are
now focusing on using pressure relief equipment to reduce the
incidence of acquired pressure ulcers.
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Products
and Services
Specialty beds, mattress replacements and overlays are the
primary products currently available for pressure relief and
pressure reduction to treat and prevent decubitus ulcers. The
market for specialty beds and support surfaces include the acute
care centers, long-term care centers, nursing home centers and
home healthcare centers. Medical support surfaces are designed
to have preventative and/or therapeutic uses. Four basic product
categories are:
Alternating pressure mattress
replacements: Mattresses which can be used
for therapy or prevention and are typically manufactured using
air cylinders or a combination of air cylinders and foam.
Systems are designed to inflate every other cylinder 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. Typically a control unit is included in an alternating
pressure system that provides automatic changes in the
distribution of air pressure. While today this segment
represents a small portion of the overall market for medical
support surfaces, Anodynes management expects it to grow
rapidly, due to the superior therapeutic and preventative
benefits of alternating pressure and increased focus on the
prevention and treatment of bed sores. Anodyne produces a range
of alternating pressure mattress replacements and, as confirmed
by customer interviews, is viewed as a leader in development of
these systems.
Low air loss mattress
replacements: Mattresses that allow air to
flow from the mattress and adjust support according to the
patients weight and position. Low air loss systems may
provide additional features such as controlled air leakage,
which reduces skin moisture levels, and lateral rotation which
can aid in patient turning and reduces risks associated with
fluid building up in a patients lungs. Anodyne currently
produces low air loss mattress systems which management believes
is the only low air loss product on the market that gets air to
the patients skin directly through a patented process.
Static mattress replacement
systems: Consists of mattresses which have no
powered elements. Their support material can be composed of
foam, air, water, gel or a combination of the two. In the case
of water or gel materials, they are held in place with
containment bladders. Static mattress replacement systems
distribute a patients body weight to lessen forces on
pressure points. These products currently comprise the majority
of support surfaces. Currently Anodyne manufactures a range of
foam based static mattress systems.
Mattress overlays and positioning
devices: These products are gel based, foam
based or air filled surfaces which help to position patients and
prevent the development of bed sores through reducing heat,
sheer and moisture. Overlays reduce the incidence of bed sores
by providing air to the patients skin and dispersion
pressure through the use of foams and gels. 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 range of foam based mattress
overlays and positioning devices.
Competition
The competition in the medical support surfaces market is based
on product performance, 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 over 70 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
WCW, Inc. and other smaller competitors. Anodyne differentiates
itself from these competitors based on the quality of the
products it manufactures as well as its ability to produce a
full line of foam and air mattresses and positioning devices.
While many manufacturers specialize in the production of a
single type of support surface, 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. In
addition, Anodynes management believes that its multiple
locations provide it with a competitive advantage due to its
ability to offer standard products nationwide.
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Business
Strategies
Anodynes management is focused on strategies to grow
revenues, improve operating efficiency and improve gross
margins. Of particular note, Anodyne has completed three
acquisitions since its inception and believes that numerous
benefits to consolidation exist within the support surfaces
industry. The following is a discussion of these strategies:
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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.
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Leverage scale to provide industry leading research and
development Medical support surfaces are
becoming increasingly advanced in nature. Anodynes
management believes that many smaller competitors to do not have
the resources required to effectively meet the changing needs of
their customers and believes that increased scale acquired
though acquisitions will allow it to better serve its customers
through industry leading research and development.
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Pursue cost savings through scale purchasing and
operational improvements As many of the
products used to manufacture medical support surfaces are
standard in nature, management believes that increased scale
achieved through acquisitions will allow it to benefit from
lower costs of materials and therefore lower costs of sales. In
addition, management believes that there are opportunities to
improve the operations of smaller acquired entities and in turn
benefit from production efficiencies.
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Research
and Development
Anodyne develops products 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 to ensure mattress systems have the desired
properties while smaller distributors will tend to buy more
standardized products. Anodyne has seven dedicated
professionals, including individuals focused on process
engineering, design engineering, and electrical engineering,
working on the development of the companys next generation
of support surfaces.