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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-K/A
Amendment
No. 1
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-51937
Compass Diversified Holdings
(Exact name of registrant as specified in its charter)
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Delaware
(Jurisdiction of incorporation or organization)
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57-6218917
(I.R.S. Employer Identification No.) |
Commission File Number: 0-51938
Compass Group Diversified Holdings LLC
(Exact name of registrant as specified in its charter)
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Delaware
(Jurisdiction of incorporation or organization)
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20-3812051
(I.R.S. Employer Identification No.) |
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Sixty One Wilton Road
Second Floor |
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Westport, CT
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06880 |
(Address of principal executive offices)
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(Zip Code) |
(203) 221-1703
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Shares representing beneficial interests in Compass Diversified
Holdings (Trust shares)
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NASDAQ Stock Market, Inc. |
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrants are collectively a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrants are collectively not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrants (1) have filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrants were required to file such reports),
and (2) have been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrants are collectively a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the outstanding shares of trust stock held by non-affiliates
of Compass Diversified Holdings at June 30, 2008 was $261,006,919 based on the closing price on
the Nasdaq on that date. For purposes of the foregoing calculation only, all directors and
officers of the registrant have been deemed affiliates.
There were 31,525,000 shares of trust stock without par value outstanding at February 27,
2009.
Documents Incorporated by Reference
Certain information in the registrants definitive proxy statement to be filed with the
Commission relating to the registrants 2009 Annual Meeting of Stockholders is incorporated by
reference into Part III.
Explanatory Note
This Amendment No. 1 to the Registrants Annual Report on
Form 10K filed on March 13, 2009 (the Amendment) is
being filed solely for the purpose of including conformed signatures of the Registrants Independent Registered Public
Accounting Firm on: (i) the accountants reports included in the Registrants original Annual Report on Form 10K filed
on March 13, 2009 (the Report) on pages F-3 and F-4; and (ii) the consent included as Exhibit 23.1 of the electronic
filing. The accountants reports and the accountants consent included in the Report were manually signed prior to
filing. However, the conformed signatures were inadvertently omitted in the electronic filing of the Report. Other than
including the aforementioned conformed signatures to the accountants report and the consent, this Amendment does
not modify the disclosures contained in the Report and we have not updated disclosures contained therein to reflect any
events that may have occurred at a date subsequent to the filing of the Report.
Table of Contents
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PART I |
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Item 1.
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Business
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Item 1A.
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Risk Factors
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50 |
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Item 1B.
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Unresolved Staff Comments
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67 |
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Item 2.
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Properties
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67 |
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Item 3.
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Legal Proceedings
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69 |
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Item 4.
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Submission of Matters to a Vote of Security Holders
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69 |
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PART II |
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Item 5.
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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70 |
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Item 6
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Selected Financial Data
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72 |
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Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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74 |
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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102 |
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Item 8.
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Financial Statements and Supplementary Data
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103 |
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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103 |
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Item 9A
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Controls and Procedures
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103 |
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Item 9B.
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Other Information
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103 |
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PART III |
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Item 10.
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Directors, Executive Officers and Corporate Governance
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Item 11.
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Executive Compensation
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104 |
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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104 |
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Item 14.
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Principal Accounting Fees and Services
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104 |
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PART IV |
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Item 15.
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Exhibits, Financial Statement Schedules
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105 |
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Signatures
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106 |
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Financial Statements |
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F-1 |
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Schedule II. Valuation and Qualifying Accounts |
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S-1 |
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Index to Exhibits |
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E-1 |
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1
NOTE TO READER
In reading this Annual Report on Form 10-K, references to:
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the Trust and Holdings refer to Compass Diversified Holdings; |
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our businesses refer to, collectively, the businesses controlled by the
Company; |
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the Company refer to Compass Group Diversified Holdings LLC; |
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the Manager refer to Compass Group Management LLC (CGM); |
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the initial businesses refer to, collectively, CBS Personnel Holdings,
Inc., Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue
Technologies Group, Inc.; |
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the 2006 acquisitions refer to, collectively, the acquisitions of Compass AC
Holdings, Inc., Anodyne Medical Device, Inc., CBS Personnel Holdings, Inc and
Silvue Technologies Group, Inc.; |
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the 2007 acquisitions refer to, collectively, the acquisitions of Aeroglide
Holdings, Inc., HALO Branded Solutions and American Furniture Manufacturing; |
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the 2008 acquisitions refer to, collectively, the acquisitions of Fox
Factory Inc. and Staffmark Investment LLC; |
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the 2007 disposition refers to, the sale of Crosman Acquisition
Corporation; |
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the 2008 dispositions refer to, collectively, the sales of Aeroglide
Holdings, Inc. and Silvue Technologies Group, Inc.; |
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the Trust Agreement refer to the amended and restated Trust Agreement of
the Trust dated as of April 25, 2007; |
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the Credit Agreement refer to the Credit Agreement with a group of lenders
led by Madison Capital, LLC which provides for a Revolving Credit Facility and a Term
Loan Facility; |
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the Revolving Credit Facility refer to the $340 million Revolving Credit
Facility provided by the Credit Agreement that matures in December 2012; |
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the Term Loan Facility refer to the $153.0 million Term Loan Facility, as
of December 31, 2008, provided by the Credit Agreement that matures in December 2013; |
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the LLC Agreement refer to the Second Amended and Restated Operating
Agreement of the Company dated as of January 9, 2007; and |
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we, us and our refer to the Trust, the Company and our businesses
together. |
2
Statement Regarding Forward-Looking Disclosure
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This Annual Report on Form 10-K, including the sections entitled Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operations and Business, contains
forward-looking statements. We may, in some cases, use words such as project, predict,
believe, anticipate, plan, expect, estimate, intend, should, would, could,
potentially, or may or other words that convey uncertainty of future events or outcomes to
identify these forward-looking statements. Forward-looking statements in this prospectus are
subject to a number of risks and uncertainties, some of which are beyond our control, including,
among other things: |
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our ability to successfully operate our 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 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 when due and pay the put price if and when due; |
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our ability to make and finance future acquisitions; |
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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; |
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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 businesses; |
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our and our Managers ability to retain or replace qualified employees of our 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 businesses. |
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Our actual results, performance, prospects or opportunities could differ materially from
those expressed in or implied by the forward-looking statements. A description of some of the
risks that could cause our actual results to differ appears under the section Risk Factors.
Additional risks of which we are not currently aware or which we currently deem immaterial
could also cause our actual results to differ. |
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In light of these risks, uncertainties and assumptions, you should not place undue
reliance on any forward-looking statements. The forward-looking events discussed in this
Annual Report on Form 10-K may not occur. These forward-looking statements are made as of the
date of this Annual Report. We undertake no obligation to publicly update or revise any
forward-looking statements to reflect subsequent events or circumstances, whether as a result
of new information, future events or otherwise, except as required by law. |
3
PART I
ITEM 1. BUSINESS
Compass Diversified Holdings, a Delaware statutory trust (Holdings, or the Trust), was
incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a
Delaware limited liability Company (the Company), was also formed on November 18, 2005. The
Trust and the Company (collectively CODI) were formed to acquire and manage a group of small
and middle-market businesses headquartered in North America. The Trust is the sole owner of
100% of the Trust Interests, as defined in our LLC Agreement, of the Company. Pursuant to that
LLC Agreement, the Trust owns an identical number of Trust Interests in the Company as exist
for the number of outstanding shares of the Trust. Accordingly, our shareholders are treated
as beneficial owners of Trust Interests in the Company and, as such, are subject to tax under
partnership income tax provisions.
The Company is the operating entity with a board of directors whose corporate governance
responsibilities are similar to that of a Delaware corporation. The Companys board of
directors oversees the management of the Company and our businesses and the performance of
Compass Group Management LLC (CGM or our Manager). Our Manager is the sole owner of our
Allocation Interests, as defined in our LLC Agreement.
Overview
We acquire controlling interests in businesses that we believe operate in industries with
long-term macroeconomic growth opportunities, and that have positive and stable cash flows,
face minimal threats of technological or competitive obsolescence and have strong management
teams largely in place.
Our structure provides public investors with an opportunity to participate in the ownership and
growth of companies which have historically been owned by private equity firms, wealthy
individuals or families. Through the acquisition of a diversified group of businesses with
these characteristics, we also offer investors an opportunity to diversify their own portfolio
risk while participating in the ongoing cash flows of those businesses through the receipt of
distributions.
Our disciplined approach to our target market provides opportunities to methodically purchase
attractive businesses at values that are accretive to our shareholders. For sellers of
businesses, our unique structure allows us to acquire businesses efficiently with little or no
financing contingencies and, following acquisition, to provide our businesses with substantial
access to growth capital.
We believe that private company operators and corporate parents looking to sell their
businesses may consider us an attractive purchaser because of our ability to:
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provide ongoing strategic and financial support for their businesses; |
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maintain a long-term outlook as to the ownership of those businesses where such an
outlook is required for maximization of our shareholders return on investment; and |
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consummate transactions efficiently without being dependent on third-party financing
on a transaction-by-transaction basis. |
In particular, we believe that our outlook on length of ownership may alleviate the concern
that many private company operators and parent companies may have with regard to their
businesses going through multiple sale processes in a short period of time. We also believe
this outlook both reduces the risk that businesses may be sold at unfavorable points in the
overall market cycle and enhances our ability to develop a comprehensive strategy to grow the
earnings and cash flows of our businesses, which we expect will better enable us to meet our
long-term objective of paying distributions to our shareholders and increasing shareholder
value. Finally, we have found that our ability to acquire businesses without the cumbersome
delays and conditions typical of third party transactional financing can be very appealing to
sellers of businesses who are interested in confidentiality and certainty to close.
We believe our management teams strong relationships with industry executives, accountants,
attorneys, business brokers, commercial and investment bankers, and other potential sources of
acquisition opportunities offer us substantial opportunities to assess small to middle market
businesses that may be available for acquisition. In addition, the flexibility, creativity, experience and expertise of our
management team in structuring transactions allows us to consider non-traditional and complex
transactions tailored to fit a specific acquisition target.
4
In terms of the businesses in which we have a controlling interest as of December 31, 2008, we
believe that these businesses have strong management teams, operate in strong markets with
defensible market niches and maintain long standing customer relationships. We believe that the
strength of this model, which provides for significant industry, customer and geographic
diversity, will become even more apparent in the current challenging economic environment.
2008 Highlights
Acquisition of Fox
On January 4, 2008, we purchased a controlling interest in Fox Factory Holding Corp. (Fox)
for approximately $80.4 million. Fox, headquartered in Watsonville, California, is a leading
designer and manufacturer of high-end suspension products for mountain bikes and power sports.
We made loans to and purchased a controlling interest in Fox representing approximately 75.5%
of the outstanding stock on a primary basis and approximately 69.8% on a fully diluted basis.
Acquisition of Staffmark
On January 21, 2008, CBS Personnel Holdings, Inc. (CBS Personnel) acquired Staffmark
Investment LLC (Staffmark) for approximately $133.8 million, including fees and transaction
costs. Staffmark is a leading provider of commercial staffing services in the United States.
The majority of Staffmarks revenues are derived from light industrial staffing, with the
balance of revenues derived from administrative and transportation staffing, permanent
placement services and managed solutions. As a result of the Staffmark acquisition we now own
approximately 66.4% of the outstanding stock of CBS personnel on a primary basis and
approximately 62.4% on a fully diluted basis.
Aeroglide disposition
On June 24, 2008, we sold our majority owned subsidiary, Aeroglide Holdings, Inc. (Aeroglide),
for a total enterprise value of $95.0 million. Our share of the net proceeds, after accounting for
the redemption of Aeroglides minority holders and payment of transaction expenses, totaled
approximately $85.6 million. Our Manager was paid a profit allocation from this sale in August
2008, totaling approximately $7.3 million. We recognized a gain on the sale of approximately $34.0
million or $1.08 per share.
Silvue disposition
On June 25, 2008, we sold our majority owned subsidiary, Silvue Technologies Group, Inc.
(Silvue), for a total enterprise value of $95.0 million. Our share of the net proceeds, after
accounting for the redemption of Silvues minority holders and payment of transaction expenses
totaled approximately $71.3 million. Our Manager was paid a profit allocation from this sale in
August 2008, totaling approximately $7.7 million. We recognized a gain on the sale of approximately
$39.4 million or $1.25 per share.
2008 distribution increase
We increased our quarterly distribution from $0.325 per share to $0.34 per share during the
third quarter of 2008. For the 2008 fiscal year, we declared distributions to our shareholders
totaling $1.33 per share.
The following is a brief summary of the businesses in which we own a controlling interest at
December 31, 2008:
Advanced Circuits
Compass AC Holdings, Inc. (Advanced Circuits or ACI), with operations 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. We made loans
to and purchased a controlling interest in Advanced Circuits, on May 16, 2006, for
approximately $81.0 million, representing approximately 70.2% of the outstanding stock of
Advanced Circuits on a primary and fully diluted basis.
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American Furniture
AFM Holdings Corporation (American Furniture or AFM) with operations headquartered in Ecru,
Mississippi, is a leader in the manufacturing of low-cost upholstered stationary and motion
furniture, including sofas, loveseats, sectionals, recliners and complementary products to the
promotional furniture market. We made loans to and purchased a controlling interest in AFM on
August 31, 2007 for approximately $97.0 million, representing approximately 93.9% of AFMs
outstanding stock on a primary basis and 84.5% on a fully diluted basis.
Anodyne
Anodyne Medical Device, Inc. (Anodyne) with operations headquartered in Coral Springs,
Florida, 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. We made loans to and purchased a controlling interest in
Anodyne from Compass Group Investments, Inc. (CGI) on August 1, 2006 for approximately $31.0
million, representing approximately 47.3% of the outstanding capital stock, on a fully-diluted
basis, which represents approximately 69.8% of the voting power of all Anodyne stock on a fully
diluted basis.
In August 2008, we increased our ownership percentage to approximately 67.0% as a result of (i)
exchanging a promissory note due from the former CEO, totaling $6.9 million, for shares of
common stock of Anodyne and (ii) exchanging term debt due from Anodyne, totaling $1.5 million,
for shares of common and convertible preferred stock of Anodyne.
CBS Personnel
CBS Personnel, headquartered in Cincinnati, Ohio, is a provider of temporary staffing services
in the United States. In order to provide its more than 6,500 clients with tailored staffing
services to fulfill their human resources needs, CBS Personnel also offers employee leasing
services, permanent staffing and temporary-to-permanent placement services. We made loans to
and purchased a controlling interest in CBS Personnel, on May 16, 2006, for approximately
$128.0 million.
On January 21, 2008, CBS Personnel acquired Staffmark for approximately $133.8 million,
including fees and transaction costs. Like CBS Personnel, Staffmark is one of the leading
providers of commercial staffing services in the United States, providing staffing services in
over 30 states. CBS Personnel repaid approximately $80.0 million in Staffmark indebtedness and
issued $47.9 million in CBS Personnel common stock for all the equity interests in Staffmark.
As a result of the Staffmark acquisition we now own approximately 66.4% of the outstanding
stock of CBS personnel on a primary basis and approximately 62.4% on a fully diluted basis.
Fox
Fox, with operations headquartered in Watsonville, California, is a designer, manufacturer and
marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles
and other off-road vehicles. Fox acts both as a tier one supplier to leading action sport
original equipment manufacturers (OEM) and provides after-market products to retailers and
distributors (Aftermarket). Foxs products are recognized as the industrys performance
leaders by retailers and end-users alike. We made loans to and purchased a controlling
interest in Fox, on January 4, 2008, for approximately $80.4 million, representing
approximately 75.5% of the outstanding common stock on a primary basis and 69.8% on a fully
diluted basis.
HALO
HALO Lee Wayne LLC, operating under the brand names of HALO and Lee Wayne (HALO), with
operations headquartered in Sterling, Illinois, serves as a one-stop shop for over 40,000
customers providing design, sourcing, management and fulfillment services across all categories
of its customer promotional product needs in effectively communicating a logo or marketing
message to a target audience. HALO has established itself as a leader in the promotional
products and marketing industry through its focus on servicing its group of over 950 account
executives. We made loans to and purchased a controlling interest in HALO on February 28,
2007, for approximately $62.0 million, representing approximately 88.3% of the outstanding
equity on a primary basis and 73.6% fully diluted basis.
6
Tax Reporting
Information returns will be filed by the Trust and the Company with the IRS, as required, with
respect to income, gain, loss, deduction and other items derived from the companys activities.
The Company has and will file a partnership return with the IRS and intends to issue a Schedule
K-1 to the trustee. The trustee intends to provide information to each holder of shares using a
monthly convention as the calculation period. For 2008, and future years, the Trust has, and
will continue to file a Form 1065 and issue Schedules K-1 to shareholders. For 2008, we
delivered the Schedule K-1 to shareholders within the same time frame as we delivered the
schedule to shareholders for the 2007 taxable year. The relevant and necessary information for
tax purposes is readily available electronically through our website. Each holder will be
deemed to have consented to provide relevant information, and if the shares are held through a
broker or other nominee, to allow such broker or other nominee to provide such information as
is reasonably requested by us for purposes of complying with our tax reporting obligations.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC Forms S-1, S-3, 10-Q, 10-K and 8-K, which include exhibits,
schedules and amendments, under the Securities Act. These forms can be inspected and copied at
the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549-1004. The public
may obtain information about the operation of the public reference room by calling the SEC at
1-800-SEC-0300. In addition, the SEC maintains a web site at http://www.sec.gov that contains
the Forms S-1 and S-3 as well as other reports, proxy and information statements and
information regarding issuers that file electronically with the SEC. In addition, copies can
be accessed indirectly thorough our website http://www.compassdiversifiedholdings.com.
7
(1) |
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CGI and its affiliate, our single largest holder beneficially own 24.4% of the Trust shares,
and is our single largest holder. Mr. Massoud is not a director, officer or member of CGI or
any of its affiliates. |
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Owned by members of our Manager, including Mr. Massoud as managing member. |
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Mr. Massoud is the managing member. |
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The Allocation Interests, which carry the right to receive a profit allocation, represent
less than 0.1% equity interest in the Company. |
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Mr. Day is a non-managing member. |
8
Our Manager
We have engaged CGM, our Manager, to manage the day-to-day operations and affairs of the
Company and to execute our strategy, as discussed below. Our management team, while working
for a subsidiary of CGI, originally acquired each of our initial businesses and Anodyne and
oversaw their operations prior to our acquiring them. Our management team has worked together
since 1998. Collectively, our management team has approximately 75 years of experience in
acquiring and managing small and middle market businesses. We believe our Manager is unique in
the marketplace in terms of the success and experience of its employees in acquiring and
managing diverse businesses of the size and general nature of our businesses. We believe this
experience will provide us with an advantage in executing our overall strategy. Our management
team devotes a majority of its time to the affairs of the Company.
We have entered into a management services agreement with our Manager (the Management Services
Agreement) pursuant to which our Manager manages the day-to-day operations and affairs of the
Company and oversees the management and operations of our businesses. We pay our Manager a
quarterly management fee for the services it performs on our behalf. In addition, our Manager
receives a profit allocation as a result of its ownership of Allocation Interests in us. See
Part III, Item 13 Certain Relationships and Related Transactions for further descriptions of
the management fees and profit allocation to be paid to our Manager. In consideration of our
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 us to purchase its
Allocation Interests upon termination of the Management Services Agreement. Our Manager owns
100% of the Allocation Interests of the Company, for which it paid an aggregate of $100,000.
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 Part III, Item 13, Certain Relationships and Related Party Transactions.
Market Opportunity
We acquire and manage small to middle market businesses. We characterize small to middle
market businesses as those that generate annual cash flows of up to $60 million. We believe
that the merger and acquisition market for small to middle market businesses is highly
fragmented and provides opportunities to purchase businesses at attractive prices. We believe
that the following factors contribute to lower acquisition multiples for small to middle market
businesses:
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there are fewer potential acquirers for these businesses; |
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third-party financing generally is less available for these acquisitions; |
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sellers of these businesses frequently consider non-economic factors, such as
continuing board membership or the effect of the sale on their employees; and |
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these businesses are less frequently sold pursuant to an auction process. |
We believe that opportunities exist to augment existing management at such businesses and
improve the performance of these businesses upon their acquisition. In the past, our
management team has acquired businesses that were owned by entrepreneurs or large corporate
parents. In these cases, our management team has frequently found that there have been
opportunities to further build upon the management teams of acquired businesses beyond those in
existence at the time of acquisition. In addition, our management team has frequently found
that financial reporting and management information systems of acquired businesses may be
improved, both of which can lead to improvements in earnings and cash flow. Finally, because
these businesses tend to be too small to have their own corporate development efforts, we
believe opportunities exist to assist these businesses as they pursue organic or external
growth strategies that were often not pursued by their previous owners. Because we intend to
fund acquisitions through the utilization of our Revolving Credit Facility, we believe the
current financing environment is conducive to our ability to consummate acquisitions.
9
Our Strategy
We have two primary strategies that we use in order to provide distributions to our
shareholders and increase shareholder value. First, we focus on growing the earnings and cash
flow from our businesses. We believe that the scale and scope of our businesses give us a
diverse base of cash flow upon which to further build. Second, we identify, perform due
diligence on, negotiate and consummate additional platform acquisitions of small to middle
market businesses in attractive industry sectors in accordance with acquisition criteria
established by the board of directors from time to time.
Management Strategy
Our management strategy involves the proactive financial and operational management of the
businesses we own in order to pay distributions to our shareholders and increase shareholder
value. Our Manager oversees and supports the management teams of each of our businesses by,
among other things:
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recruiting and retaining talented managers to operate our businesses using
structured incentive compensation programs, including minority equity ownership,
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; |
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identifying and working with management to execute attractive external growth and
acquisition opportunities; |
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assist management in controlling and right-sizing overhead costs, particularly in
the current challenging economic environment ; 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. |
Specifically, while our businesses have different growth opportunities and potential rates of
growth, we expect our Manager to work with the management teams of each of our businesses to
increase the value of, and cash generated by, each business through various initiatives,
including:
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making selective capital investments to expand geographic reach, increase capacity,
or reduce manufacturing costs of our businesses; |
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investing in product research and development for new products, processes or
services for customers; |
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improving and expanding existing sales and marketing programs; |
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pursuing reductions in operating costs through improved operational efficiency or
outsourcing of certain processes and products; and |
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consolidating or improving management of certain overhead functions. |
In terms of the difficult economic environment we are currently facing, we and each of
subsidiary management teams are intensely focused on performance and cost control measures
through this economic cycle.
Our businesses may also acquire and integrate complementary businesses. We believe that
complementary acquisitions will improve our overall financial and operational performance by
allowing us to:
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leverage manufacturing and distribution operations; |
10
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leverage branding and marketing programs, as well as customer relationships; |
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add experienced management or management expertise; |
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increase market share and penetrate new markets; and |
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realize cost synergies by allocating the corporate overhead expenses of our
businesses across a larger number of businesses and by implementing and coordinating
improved management practices. |
We incur third party debt financing almost entirely at the Company level, which we use, in
combination with our equity capital, to provide debt financing to each of our businesses or to
acquire additional businesses We believe this financing structure is beneficial to the
financial and operational activities of each of our businesses by aligning our interests as
both equity holders of, and lenders to, our businesses, in a manner that we believe is more
efficient than our businesses borrowing from third-party lenders.
Acquisition Strategy
Our acquisition strategy involves the acquisition of businesses that we expect to produce
stable and growing earnings and cash flow. In this respect, we expect to make acquisitions in
industries other than those in which our businesses currently operate if we believe an
acquisition presents an attractive opportunity. We believe that attractive opportunities will
continue to present themselves, as private sector owners seek to monetize their interests in
longstanding and privately-held businesses and large corporate parents seek to dispose of their
non-core operations.
Our ideal acquisition candidate has the following characteristics:
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is an established North American based company; |
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maintains a significant market share in defensible industry niche (i.e., has a
reason to exist); |
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has a solid and proven management team with meaningful incentives; |
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has low technological and/or product obsolescence risk; and |
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maintains a diversified customer and supplier base. |
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. In particular, because there may be a lack of
information available about these target businesses, which may make it more difficult to
understand or appropriately value such target businesses, on our behalf, our Manager:
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engages in a substantial level of internal and third-party due diligence; |
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critically evaluates the management team; |
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identifies and assesses any financial and operational strengths and weaknesses of
the target business; |
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analyzes comparable businesses to assess financial and operational performances
relative to industry competitors; |
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actively researches and evaluates information on the relevant industry; and |
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thoroughly negotiates appropriate terms and conditions of any acquisition. |
The process of acquiring new businesses is both time-consuming and complex. Our management
team historically has taken from two to twenty-four months to perform due diligence, negotiate
and close acquisitions. Although our management team is always at various stages of evaluating
several transactions at any given time, there may be periods of time during which our
management team does not recommend any new acquisitions to us.
11
Upon acquisition of 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 successful business plan.
We believe, due to our financing structure, in which both equity and debt capital are raised at
the Company level allowing us to acquire businesses without transaction specific financing,
that the current difficult financing environment is conducive to our ability to consummate
transactions that may be attractive in both the short and long-term.
In addition to acquiring businesses, we sell businesses that we own from time to time when
attractive opportunities arise that outweigh the value that we believe we will be able to bring
to such businesses consistent with our long-term investment strategy. As such, our decision to
sell a business is based on our belief that doing so will increase shareholder value to a
greater extent than through our continued ownership of that business. Upon the sale of a
business, we may use the proceeds to retire debt or retain proceeds for acquisitions or general
corporate purposes. Generally, we do not expect to make special distributions at the time of a
sale of one of our businesses; instead, we expect to pay shareholder distributions over time
through the earnings and cash flows of our businesses.
Since our inception in May 2006 we have recorded gains on sales of our businesses of over $100
million, or $3.00 per share. We sold Crosman in January 2007 and Aeroglide and Silvue in June
2008. We sold Crosman, our majority owned recreational products company for approximately $143
million and our net proceeds and gain on sale were approximately $110 million and $36 million,
respectively. We sold Aeroglide, our majority owned designer and manufacturer of industrial
drying and cooling equipment for approximately $95 million and our net proceeds and gain on
sale were approximately $78 million and $34 million, respectively. Finally, we sold Silvue,
our majority owned developer and producer of proprietary, high performance liquid coating
systems for approximately $95 million and our net proceeds and gain on sale were approximately
$64 million and $39 million, respectively.
Strategic Advantages
Based on the experience of our management team and its ability to identify and negotiate
acquisitions, we believe we are well-positioned to acquire additional businesses. Our
management team has strong relationships with business brokers, investment and commercial
bankers, accountants, attorneys and other potential sources of acquisition opportunities. In
addition, our management team also has a successful track record of acquiring and managing
small to middle market businesses in various industries. In negotiating these acquisitions, we
believe our management team has been able to successfully navigate complex situations
surrounding acquisitions, including corporate spin-offs, transitions of family-owned
businesses, management buy-outs and reorganizations.
Our management team has a large network of over 2,000 deal intermediaries who we expect to
expose us to potential acquisitions. Through this network, as well as our management teams
proprietary transaction sourcing efforts, we have a substantial pipeline of potential
acquisition targets. Our management team also has a well established network of contacts,
including professional managers, attorneys, accountants and other third-party consultants and
advisors, who may be available to assist us in the performance of due diligence and the
negotiation of acquisitions, as well as the management and operation of our businesses once
acquired.
Finally, because we intend to fund acquisitions through the utilization of our Revolving Credit
Facility, we expect to minimize the delays and closing conditions typically associated with
transaction specific financing, as is typically the case in such acquisitions. We believe this
advantage is a powerful one, especially in the current credit environment, and is highly
unusual in the marketplace for acquisitions in which we operate.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs a rigorous
due diligence and financial evaluation process. In doing so, we evaluate the operations of the
target business as well as the outlook for the industry in which the target business operates.
While valuation of a business is, by definition, a subjective process, we define valuations
under a variety of analyses, including:
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discounted cash flow analyses; |
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evaluation of trading values of comparable companies; |
12
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expected value matrices; and |
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examination of recent transactions. |
One outcome of this process is a projection of the expected cash flows from the target
business. A further outcome is an understanding of the types and levels of risk associated
with those projections. While future performance and projections are always uncertain, we
believe that with detailed due diligence, future cash flows will be better estimated and the
prospects for operating the business in the future better evaluated. To assist us in
identifying material risks and validating key assumptions in our financial and operational
analysis, in addition to our own analysis, we engage third-party experts to review key risk
areas, including legal, tax, regulatory, accounting, insurance and environmental. We also
engage technical, operational or industry consultants, as necessary.
A further critical component of the evaluation of potential target businesses is the assessment
of the capability of the existing management team, including recent performance, expertise,
experience, culture and incentives to perform. Where necessary, and consistent with our
management strategy, we actively seek to augment, supplement or replace existing members of
management who we believe are not likely to execute our business plan for the target business.
Similarly, we analyze and evaluate the financial and operational information systems of target
businesses and, where necessary, we enhance and improve those existing systems that are deemed
to be inadequate or insufficient to support our business plan for the target business.
Financing
We have a Credit Agreement with a group of lenders led by Madison Capital, LLC. The Credit
Agreement provides for a Revolving Credit Facility totaling $340.0 million and a Term Loan
Facility totaling $153.0 million. The Term Loan Facility requires quarterly payments of $0.5
million that commenced March 31, 2008, and a final payment of the outstanding principal balance
on December 7, 2013. The Revolving Credit Facility matures on December 7, 2012. The Credit
Agreement permits the Company to increase, over the next two years, the amount available under
the Revolving Credit Facility by up to $10.0 million and the Term Loan Facility by up to $145.0
million, subject to certain restrictions and Lender approval.
The Credit Agreement provides for letters of credit under the Revolving Credit Facility in an
aggregate face amount not to exceed $100 million outstanding at any time. At no time may the
(i) aggregate principal amount of all amounts outstanding under the Revolving Credit Facility,
plus (ii) the aggregate amount of all outstanding letters of credit, exceed the borrowing
availability under the Credit Agreement. At December 31, 2008, we had outstanding letters of
credit totaling $61.9 million. The borrowing availability under the Revolving Credit Facility
at December 31, 2008 was approximately $289.3 million.
On February 18, 2009, we repaid $75.0 million of the outstanding Term Loan Facility with the
unused portion of the proceeds from the sale of Aeroglide and Silvue.
The Credit Agreement is secured by all of the assets of the Company, including all of its
equity interests in, and loans to, its subsidiaries. (See Note K to the consolidated financial
statements for more detail regarding our Credit Agreement).
We intend to finance future acquisitions through our Revolving Credit Facility, cash on hand
and additional equity and debt financings. We believe, and it has been our experience, that
having the ability to finance our acquisitions with the capital resources raised by us, rather
than negotiating financing specifically relating to the acquisition of individual businesses,
provides us with an advantage in acquiring attractive businesses by minimizing delay and
closing conditions that are often related to acquisition-specific financings. This is
especially true given the recent disruptions in the overall economy and current volatility in
the financial markets. In this respect, we believe that in the future, we may need to pursue
additional debt or equity financings, or offer equity in Holdings or target businesses to the
sellers of such target businesses, in order to fund acquisitions.
13
Our Businesses
Advanced Circuits
Overview
Advanced Circuits, with operations 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 customers complete PCB needs. The prototype and quick-turn portions of the PCB industry
are characterized by customers requiring high levels of responsiveness, technical support and
timely delivery. Due to the critical roles that PCBs play in the research and development
process of electronics, customers often place more emphasis on the turnaround time and quality
of a customized PCB than on the price. Advanced Circuits meets this market need by
manufacturing and delivering custom PCBs in as little as 24 hours, providing customers with
over 98.0% error-free production and real-time customer service and product tracking 24 hours
per day. In each of the years 2008, 2007 and 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 10,000 customers with which it does
business throughout the year. These customers represent numerous end markets, and for the year
ended December 31, 2008 and 2007, no single customer accounted for more than 2% of net sales.
Advanced Circuits senior management, collectively, has approximately 90 years of experience in
the electronic components manufacturing industry and closely related industries. Additional information is available at www.4pcb.com.
For the full fiscal years ended December 31, 2008, 2007 and 2006, Advanced Circuits had net
sales of approximately $55.4 million, $52.3 million and $48.1 million, respectively and
operating income of $17.7 million, $17.1 million and $12.0 million, respectively. Advanced
Circuits had total assets of $74.0 million at December 31, 2008. Net sales from Advanced
Circuits represented 3.6%, 6.2% and 7.7% of our consolidated net sales for the years 2008, 2007
and 2006, respectively.
History of Advanced Circuits
Advanced Circuits commenced operations in 1989 through the acquisition of the assets of a small
Denver based PCB manufacturer, Seiko Circuits. During its first years of operations, Advanced
Circuits focused exclusively on manufacturing high volume, production run PCBs with a small
group of proportionately large customers. In 1992, after the loss of a significant customer,
Advanced Circuits made a strategic shift to limit its dependence on any one customer. As a
result, Advanced Circuits began focusing on developing a diverse customer base, and in
particular, on providing research and development professionals at equipment manufacturers and
academic institutions with low volume, customized prototype and quick-turn PCBs.
In 1997 Advanced Circuits increased its capacity and consolidated its facilities into its
current headquarters in Aurora, Colorado. During 2001 through 2003, despite a recession and a
reduction in United States PCB manufacturing, Advanced Circuits sales expanded by 29% as its
research and development focused customer base continued to require PCBs to perform day-to-day
activities. In 2003, to support its growth, Advanced Circuits expanded its PCB manufacturing
facility by approximately 37,000 square feet or approximately 150%.
We acquired a majority interest in Advanced Circuits on May 16, 2006.
Industry
The PCB industry, which consists of both large global PCB manufacturers and small regional PCB
manufacturers, is a vital component to all electronic equipment supply chains as PCBs serve as
the foundation for virtually all electronic products, including cellular telephones,
appliances, personal computers, routers, switches and network servers. PCBs are used by
manufacturers of these types of electronic products, as well as by persons and teams engaged in
research and development of new types of equipment and technologies. According to IPC Fourth
Quarter 2008 PCB Industry Forecast, the global PCB market, including both captive and merchant
production, including both rigid and flex boards grew at a CAGR of over 9% from $31.6 billion
in 2002 to an estimated $53.1 billion in 2008.
14
In contrast to global trends, however, production of PCBs in North America has declined by over
50% since 2000, to approximately $4.4 billion in 2007, and is expected to grow slightly over
the next several years
according to IPCs 2007-2008 Industry Analysis and Forecast for Rigid PCBs in North America
(published November 2008), which we refer to as the IPC 2008 Analysis. The rapid decline in
United States production was caused by (i) reduced demand for and spending on PCBs following
the technology and telecom industry decline in early 2000; and (ii) increased competition for
volume production of PCBs from Asian competitors benefiting from both lower labor costs and
less restrictive waste and environmental regulations. While Asian manufacturers have made
large market share gains in the PCB industry overall, 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. Order, production and
delivery time, as well as responsiveness with respect to each, are key factors for
customers as PCBs are indispensable to their research and development activities. |
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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. Orders for quick-turn production PCBs conform specifically to the customers
exact end product requirements. |
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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.
Volume Production PCBs are ordered in large quantities, usually over 100 units, and
response time is less important, ranging between 15 days to 10 weeks or more. |
These categories can be further distinguished based on board complexity, with each portion
facing different competitive threats. Advanced Circuits competes largely in the prototype and
quick-turn production portions of the North American market, which have not been significantly
impacted by the Asian based manufacturers due to the quick response time required for these
products. The North American prototype and quick-turn production sectors combined represent
approximately $1.45 billion in the PCB production industry according to the IPC Report.
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 phones. Asian based manufacturers have been
generally unable to meet the lead time requirements for prototype or quick-turn PCB
production or the volume production of the most complex PCBs. This off shoring of
high-volume production orders has placed increased pricing pressure and margin
compression on many small domestic manufacturers that are no longer operating at full
capacity. Many of these small producers are choosing to cease operations, rather than
operate at a loss, as their scale, plant design and customer relationships do not allow
them to focus profitably on the prototype and quick-turn sectors of the market. |
Products and Services
A PCB is comprised of layers of laminate and contains patterns of electrical circuitry to
connect electronic components. Advanced Circuits typically manufactures 2 to 12 layer PCBs,
and has the capability to manufacture up to 14 layer PCBs. The level of PCB complexity is
determined by several characteristics, including size, layer count, density (line width and
spacing), materials and functionality. Beyond complexity, a 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. While processing these computer files, Advanced Circuits generates images of
the circuit patterns that are then physically developed on individual layers, using advanced
photographic processes. Through a variety of plating and etching processes, conductive
materials are selectively added and removed to form horizontal layers of thin circuits, called
traces, which are separated by insulating material. A finished multilayer PCB laminates
together a number of layers of circuitry. Vertical connections between layers are 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, resolving design problems that would
prohibit manufacturability before the order process is completed and manufacturing begins. The
combination of Advanced Circuits user-friendly website and its design verification tool
reduces the amount of human labor involved in the manufacture of each order as PCBs move from
Advanced Circuits website directly to its computer numerical control, or CNC, machines for
production, saving Advanced Circuits and customers cost and time. As a result of its ability
to rapidly and reliably respond to the critical customer requirements, Advanced Circuits
generally receives a premium for their prototype and quick-turn PCBs as compared to volume
production PCBs.
Advanced Circuits manufactures all high margin prototypes and quick-turn orders internally but
often utilizes external partners to manufacture production orders that do not fit within its
capabilities or capacity constraints at a given time. As a result, Advanced Circuits
constantly adjusts the portion of volume production PCBs produced internally to both maximize
profitability and ensure that internal capacity is fully utilized.
The following table shows Advanced Circuits gross revenue by products and services for the
periods indicated:
16
Gross Sales by Products and Services(1)
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Year Ended December31, |
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2008 |
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2007 |
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2006 |
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Prototype Production |
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31.6 |
% |
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32.2 |
% |
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33.4 |
% |
Quick-Turn Production |
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34.4 |
% |
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33.0 |
% |
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32.1 |
% |
Volume Production |
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27.5 |
% |
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22.3 |
% |
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20.4 |
% |
Third Party |
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6.5 |
% |
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12.5 |
% |
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14.1 |
% |
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Total |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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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 leading provider of prototype and quick-turn PCBs
in North America and focuses on satisfying customer demand for on-time delivery of high-quality
PCBs. Advanced Circuits management believes the following factors differentiate it from many
industry competitors:
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Numerous Unique Orders Per Day For the year ended December 31, 2008, Advanced
Circuits received an average of over 300 customer orders per day. Due to the large
quantity of orders received, Advanced Circuits is able to combine multiple orders in a
single panel design prior to production. Through this process, Advanced Circuits is
able to reduce the number of costly, labor intensive equipment set-ups required to
complete several manufacturing orders. As labor represents the single largest cost of
production, management believes this capability gives Advanced Circuits a unique
advantage over other industry participants. Advanced Circuits maintains proprietary
software that maximizes the number of units placed on any one panel design. A single
panel set-up typically accommodates 1 to 12 orders. Further, as a critical mass of
like orders is required to maximize the efficiency of this process, management believes
Advanced Circuits is uniquely positioned as a low cost manufacturer of prototype and
quick-turn PCBs. |
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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,
2008, Advanced Circuits did business with over 10,000 customers and added approximately
234 new customers per month. For each of the years ended December 31, 2008, 2007 and
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.com Software Advanced Circuits offers its customers unique
design verification services through its online FreeDFM.com tool. This tool, which was
launched in 2002, enables customers to receive a free manufacturability assessment
report, within minutes, resolving design problems before customers place their orders.
The service is relied upon by many of Advanced Circuits customers to reduce design
errors and minimize production costs. Beyond improved customer service, FreeDFM.com
has the added benefit of improving the efficiency of Advanced Circuits engineers, as
many routine design problems, which typically require an engineers time and attention
to identify, are identified and sent back to customers automatically. |
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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 complete suite
of products including those outside of its core production capabilities. Additionally,
these relationships allow Advanced Circuits to outsource orders for volume production
and focus internal capacity on higher margin, short lead time, production and
quick-turn manufacturing. |
17
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 management believes allow it to
offer a combination of price and customer service unequaled in the market. Advanced
Circuits intends to leverage this factor, as well as its core skill set, to increase
net sales derived from higher margin prototype and quick-turn production PCBs. In this
respect, marketing and advertising efforts focus on attracting and acquiring customers
that are likely to require these premium services. And while production composition
may shift, growth in these products and services is not expected to come at the expense
of declining sales in volume production PCBs, as Advanced Circuits intends to leverage
its extensive network of third-party manufacturing partners to continue to meet
customers demand for these services. |
|
|
|
|
Acquire Customers from Local and Regional Competitors Advanced Circuits
management believes the majority of its competition for prototype and quick-turn PCB
orders comes from smaller scale local and regional PCB manufacturers. As an early
mover in the prototype and quick-turn sector of the PCB market, Advanced Circuits has
been able to grow faster and achieve greater production efficiencies than many industry
participants. Management believes Advanced Circuits can continue to use these
advantages to gain market share. Further, Advanced Circuits has begun to enter into
prototype and quick-turn manufacturing relationships with several subscale local and
regional PCB manufacturers. According to a November 2008 IPC study, approximately 349
PCB manufacturers operate in the United States with only 34 generating annual sales in
excess of $20 million. Management believes that while many of these manufacturers
maintain strong, longstanding customer relationships, they are unable to produce PCBs
with short turn-around times at competitive prices. As a result, Advanced Circuits is
beginning to seize upon an opportunity for growth by providing production support to
these manufacturers or direct support to the customers of these manufacturers, whereby
the manufacturers act more as a broker for the relationship. |
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|
Remain Committed to Customers and Employees Advanced Circuits has remained
focused on providing the highest quality product and service to its customers. We
believe this focus has allowed Advanced Circuits to achieve its outstanding delivery
and quality record. Advanced Circuits management believes this reputation is a key
competitive differentiator and is focused on maintaining and building upon it.
Similarly, management believes its committed base of employees is a key differentiating
factor. Advanced Circuits currently has a profit sharing program and tri-annual
bonuses for all of its employees. Management also occasionally sets additional
performance targets for individuals and departments and establishes rewards, such as
lunch celebrations or paid vacations, if these goals are met. Management believes that
Advanced Circuits emphasis on sharing rewards and creating a positive work environment
has led to increased loyalty. As a result, Advanced Circuits plans on continuing to
focus on similar programs to maintain this competitive advantage. |
Research and Development
Advanced Circuits engages in continual research and development activities in the ordinary
course of business to update or strengthen its order processing, production and delivery
systems. By engaging in these activities, Advanced Circuits expects to maintain and build upon
the competitive strengths from which it benefits currently. Research and development expenses
were not material in each of the years 2008, 2007 and 2006.
18
Customers
Advanced Circuits focus on customer service and product quality has resulted in a broad base
of customers in a variety of end markets, including industrial, consumer, telecommunications,
aerospace/defense, biotechnology and electronics manufacturing. These customers range in size
from large, blue-chip manufacturers to small, not-for-profit university engineering
departments. The following table sets forth managements estimate of Advanced Circuits
approximate customer breakdown by industry sector for the fiscal years ended December 31, 2008,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Customer |
|
2007 Customer |
|
2006 Customer |
Industry Sector |
|
Distribution |
|
Distribution |
|
Distribution |
Electrical Equipment and Components |
|
|
32 |
% |
|
|
35 |
% |
|
|
40 |
% |
Measuring Instruments |
|
|
12 |
% |
|
|
15 |
% |
|
|
15 |
% |
Electronics Manufacturing Services |
|
|
16 |
% |
|
|
13 |
% |
|
|
11 |
% |
Engineer Services |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
Industrial and Commercial Machinery |
|
|
8 |
% |
|
|
5 |
% |
|
|
5 |
% |
Business Services |
|
|
2 |
% |
|
|
5 |
% |
|
|
5 |
% |
Wholesale Trade-Durable Goods |
|
|
2 |
% |
|
|
3 |
% |
|
|
3 |
% |
Educational Institutions |
|
|
6 |
% |
|
|
5 |
% |
|
|
2 |
% |
Transportation Equipment |
|
|
8 |
% |
|
|
5 |
% |
|
|
5 |
% |
All Other Sectors Combined |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Management estimates that over 90% of its orders are generated from existing customers.
Moreover, approximately 65% of Advanced Circuits orders in each of the years 2008, 2007 and
2006 were delivered within five days.
Sales and Marketing
Advanced Circuits has established a consumer products marketing strategy to both acquire new
customers and retain existing customers. Advanced Circuits uses initiatives such as direct mail
postcards, web banners, aggressive pricing specials and proactive outbound customer call
programs as part of this strategy. Advanced Circuits spends approximately 2% of net sales each
year on its marketing initiatives and advertising and has 26 employees dedicated to its
marketing and sales efforts. These individuals are organized geographically and each is
responsible for a region of North America. The sales team takes a systematic approach to
placing sales calls and receiving inquiries and, on average, will place between 250 and 350
outbound sales calls and receive between 160 and 170 inbound phone inquiries per day. Beyond
proactive customer acquisition initiatives, management believes a substantial portion of new
customers are acquired through referrals from existing customers. In addition, other customers
are acquired over the internet where Advanced Circuits generates 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 believes it has developed strong customer loyalty, as demonstrated by over 90% of its
orders being received from existing customers. Included in each customer order is an Advanced
Circuits pre-paid bounce-back card on which a customer can evaluate Advanced Circuits
services and send back any comments or recommendations. Each of these cards is read by senior
members of management, and Advanced Circuits adjusts its services to respond to the requests of
its customer base.
Substantially all revenue is derived from sales within the United States.
Advanced Circuits, due to the volume of prototype and quick turn sales, had a negligible amount
in firm backlog orders at December 31, 2008 and 2007.
Competition
There are currently an estimated 349 active domestic PCB manufacturers. Advanced Circuits
competitors differ amongst its products and services.
Competitors in the prototype and quick-turn PCBs production industry include larger companies
as well as small domestic manufacturers. The three largest independent domestic prototype and
quick-turn PCB manufacturers in North America are DDI Corp., TTM Technologies, Inc. and 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 off shoring of low and medium layer count technology to Asia. Compared to Advanced
Circuits, prototype and quick-turn PCB production accounts for much smaller
portions of each of these 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 under $20 million
that have long-term customer relationships and typically produce both prototype and quick-turn
PCBs and production PCBs for small OEMs and EMS companies. The competitive factors in
prototype and quick-turn production PCBs are response time, quality, error-free production and
customer service. Competitors in the long lead-time production PCBs generally include large
companies, including Asian manufacturers, where price is the key competitive factor.
19
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 16.1%, 14.8%
and 13.3% of net sales for each of the fiscal years ended December 31, 2008, 2007 and 2006.
The primary raw materials that are used in production are core materials, such as copper clad
layers of glass and chemical solutions, and copper and gold for plating operations,
photographic film and carbide drill bits. Multiple suppliers and sources exist for all
materials. Adequate amounts of all raw materials have been available in the past, and Advanced
Circuits management believes this will continue in the foreseeable future. Advanced Circuits
works closely with its suppliers to incorporate technological advances in the raw materials
they purchase. Advanced Circuits does not believe that it has significant exposure to
fluctuations in raw material prices. Though Advanced Circuits primary raw material, laminates
(epoxy, glass and copper), have experienced a significant increase in price in 2008, the impact
on its margins accounted for less than a 2% increase in cost of sales as a percentage of net
sales. 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. These raw material costs may decrease during fiscal 2009 due to an
expected decline in related commodity prices, but these decreases may not get passed on to us
even though a commodity price decrease exists, due to certain actions that may be taken by our
suppliers.
Intellectual Property
Advanced Circuits seeks to protect certain proprietary technology by entering into
confidentiality and non-disclosure agreements with its employees, consultants and customers, as
needed, and generally limits access to and distribution of its proprietary information and
processes. Advanced Circuits management does not believe that patents are critical to
protecting Advanced Circuits core intellectual property, but, rather, that its effective and
quick execution of fabrication techniques, its website FreeDFM.comTM and
its highly skilled workforce are the primary factors in maintaining its competitive position.
Advanced Circuits uses the following brand names: FreeDFM.comTM,
4pcb.comTM, 4PCB.comTM,
33each.comTM, barebonespcb.comTM and Advanced
CircuitsTM. These trade names have strong brand equity and are material to
Advanced Circuits business.
Regulatory Environment
Advanced Circuits manufacturing operations and facilities are subject to evolving federal,
state and local environmental and occupational health and safety laws and regulations. These
include laws and regulations governing air emissions, wastewater discharge and the storage and
handling of chemicals and hazardous substances. Advanced Circuits management believes that
Advanced Circuits is in compliance, in all material respects, with applicable environmental and
occupational health and safety laws and regulations. New requirements, more stringent
application of existing requirements, or discovery of previously unknown environmental
conditions may result in material environmental expenditures in the future. Advanced Circuits
has been recognized three times for exemplary environmental compliance as it was awarded the
Denver Metro Wastewater Reclamation District Gold Award for the years 2002, 2003 and 2005.
20
Employees
As of December 31, 2008, Advanced Circuits employed 237 persons. Of these employees, there
were 26 in sales and marketing, 6 in information technology, 9 in accounting and finance, 30 in
engineering, 14 in shipping and maintenance, 145 in production and 7 in management. None of
Advanced Circuits employees are subject to collective bargaining agreements. Advanced
Circuits believes its relationship with its employees is good.
American Furniture
Overview
American Furniture, with operations headquartered in Ecru, Mississippi, is a manufacturer of
upholstered furniture sold to large-scale furniture distributors and retailers. American
Furniture operates almost exclusively in the promotional upholstered segment of the furniture
industry which is characterized by affordable prices, standard designs and immediate
availability to retail consumers. American Furniture was founded by an individual who
subsequently installed a new management team, led by CEO Mike Thomas. American Furnitures
products are adapted from established designs in the following categories, (i) stationary, (ii)
motion, (iii) recliner and (iv) other related products including accent tables. American
Furnitures products are manufactured from common components and offer proven select fabric
options, providing manufacturing efficiency and resulting in limited design risk or inventory
obsolescence. Additional information is available at www.americanfurn.net.
On February, 12, 2008, American Furnitures 1.1 million square foot corporate office and
manufacturing facility in Ecru, MS was partially destroyed in a fire. Approximately 750
thousand square feet of the facility was impacted by the fire. The executive offices were
fundamentally unaffected. The recliner and motion plant, although largely unaffected, suffered
some smoke damage but resumed operations on February 21, 2008. There were no injuries related
to the fire.
The Company temporarily moved its stationary production lines into other facilities. In
addition to its 45 thousand square foot flex facility, management secured 166 thousand square
feet of additional manufacturing and warehouse space in the surrounding Pontotoc area. These
temporary stationary production facilities provided American Furniture with approximately 90%
of the pre-fire stationary production capabilities for the months of April, through November
where orders for stationary products were addressed by these temporary facilities. Orders for
motion and recliner products were addressed by the production facilities that were largely
unaffected by the fire at the Ecru facility. On November 7, 2008 the damaged manufacturing
facility was fully restored and operating.
For the full fiscal years ended December 31, 2008, 2007 and 2006 American Furniture had net
sales of approximately $130.9 million, $156.6 million and $165.4 million and operating income
of $5.1 million, $11.8 million and $9.9 million, respectively. American Furniture had total
assets of $119.8 million at December 31, 2008. Net sales from American Furniture represented
8.5% and 5.6% of our consolidated net sales for the years ended December 31, 2008 and 2007,
respectively.
History of American Furniture
With operations headquartered in Ecru, Mississippi, American Furniture was founded in 1998 with
an exclusive focus on promotional upholstered furniture, offering a unique value proposition
combining consistent high-quality, attractively priced products and 48-hour quick-ship service.
As American Furniture has grown, it has maintained a disciplined, production focused strategy
with proven merchandising ideally suited to serve one of the fastest growing segments of the
retail furniture marketplace, promotional furniture. AFM began operations in 1998 with four
assembly lines housed in a 60,000 sq. ft. facility. By 2002, American Furniture had achieved
revenues in excess of $120 million and grew operations into a 600,000 sq. ft. facility in
Houlka, MS. In 2004 American Furniture was sold by its founder to a group of private investors
who installed a new management structure led by Mr. Mike Thomas. Mr. Thomas successfully hired
a new executive team and grew American Furnitures administrative infrastructure in order to
build a solid foundation to support future growth. In 2005, American Furniture began to aggressively pursue
an Asian sourcing strategy for fabrics and other assorted materials. Today American Furniture
is a leading manufacturer of promotional upholstered furniture operating from an approximately
1.1 million sq. ft. of manufacturing and warehouse facility recently restored from the February
2008 fire.
We acquired a majority interest in American Furniture on August 31, 2007.
21
Industry
AFM is the leading manufacturer of upholstered furniture serving the promotional segment of the
United States furniture industry. The domestic furniture industry over the past twenty years
has realized consistent growth driven by several factors including (i) a long-term favorable
housing market and consistent growth in the purchase of second homes, (ii) favorable
demographic trends (i.e., graying/baby-boom population) and (iii) overall rise in consumer
spending have all contributed to the expansion of the domestic furniture industry prior to
2008.
Overall conditions for the furniture industry have been difficult over the past year. New
housing starts are down significantly and consumers continue to be faced with general economic
uncertainty fueled by deteriorating consumer credit markets and lagging consumer confidence as
a result of erratic financial markets. All of this has significantly impacted big ticket
consumer purchases such as furniture, and will continue to impact these purchases into 2009.
Within the wholesale market, wholesale shipments from Asian suppliers, we believe, have grown
steadily as a percent of total wholesale shipments. In 2007, Asian imports accounted for
approximately 23% of wholesale upholstered shipments. However, while Asian upholstered imports
have grown significantly in the past ten years, we believe their impact has been far less than
the industry as a whole within AFMs primary market, promotional upholstered furniture, due to
the low price points and resulting shipping costs as a percent of a pieces total value.
AFM participates largely in the promotional upholstered furniture industry. Within the U.S.
residential retail furniture marketplace, products are typically positioned in the
promotional, good, better, or best category. The scale of the categories is intended
to reflect an increasing level of quality, appearance and correspondingly price. At the
wholesale level, the promotional segment of the upholstered furniture industry we believe
accounts for $3.4 billion in sales. Promotional upholstered furniture manufacturers typically
offer a limited range of products in a discrete number of styles and/or designs, allowing
immediate delivery to retail customers at well-established retail price points. Specifically,
promotional upholstered furniture is generally priced by product at the retail level as
outlined below:
Stationary Sofas From $299 to $499
Recliners From $99 to $299
Stationary Sectionals Up to $799
Motion Sectionals Up to $1,399
Promotionally priced products are among the best-selling lines within the overall upholstered
furniture category and are expected to outpace the overall upholstered market over the next
five years. The popularity of promotional furniture is attributable to (i) the segments
consistent product quality (based on focused manufacturing on a few key furniture pieces), and
(ii) its value pricing, which appeals to the broadest cross-section of the furniture consumers.
AFM competes exclusively in the promotional segment, selling upholstered furniture in both the
stationary and motion categories. In the retail furniture landscape, promotional furniture is
a growing catalyst of floor traffic and sales volumes for mass market furniture retailers.
Recurring promotional programs have become core to retailer strategies given its immediate
availability to customers, just-in-time strategies employed within the industry limiting
retailer inventory requirements, and high level of value for price strategy. According to a
report published by an industry consultant in 2007, the promotional segment of the upholstered
market is expected to grow at 5 8% annually over the next five years vs. 4 6% for the
overall upholstered furniture market.
Off-shore
Imports
Furniture manufactured in Asia emerged as an important driver of the U.S. residential furniture
market beginning in the mid-1990s. While off-shore manufacturers, particularly Chinese and
Vietnamese manufacturers, have affected the entire industry, the import trend has impacted different
segments of the industry at varying levels.
22
Case-goods and metal furniture have proven to be more susceptible to Asian competition than
upholstered furniture due to the stack ability and assembly characteristics, resulting in
efficient freight consolidation. Upholstered furniture cannot be broken down and shipped
efficiently to the U.S. such that the resulting freight costs tend to out weigh the labor and
material savings achieved through offshore manufacturing. As a result, domestic upholstered
manufacturers have largely managed to compete effectively against Asian competitors when
compared to other segments of the furniture industry. In addition, manufacturers in the
promotional segment of the upholstered industry are even further insulated from offshore
competition due not only to overall freight costs but also freight costs when compared to
wholesale price of the product together with the prolonged lead-times to retailers and end
customers in a market segment characterized very short lead-times and immediate delivery to the
end consumer.
Retail price points in the promotional segment of the upholstered industry range from $99 -
$1,399, whereas shipping costs from Asia on a per piece basis are generally in excess of $100
per piece ($3,000 $4,000) per standard 40 container, not including domestic shipping and
insurance costs).
In addition to the increased cost, lead times also hinder Asian manufacturers ability to
effectively compete in the promotional upholstered industry. As mentioned previously,
retailers use promotional furniture to drive store traffic and provide immediately delivery to
the end-user of value-priced, quality upholstered furniture products. AFM aims to ship
customer orders 48 hours following receipt of an order with delivery occurring 1 3 days
following depending on the customers location within the U.S. Asian manufacturers typically
require at least 50 days (or 7 8 weeks depending on business days) from order receipt to
customer delivery, resulting in a significant amount of increased inventory management and
advertising planning in order to effectively source upholstered product from overseas
manufacturers.
Products and Services
AFM manufactures two basic categories of promotional upholstered products, stationary and
motion. Stationary products include sofas, loveseats and sectionals, these products accounted
for approximately 63%, 64% and 63% of sales in fiscal 2008, 2007 and 2006, respectively.
Motion products include single rocking recliner chairs, sofas with reclining end seats,
loveseats with seats that rock together or separately and reclining sectionals with storage
compartments. Motion and reclining products contributed approximately 33%, 33% and 34% of
fiscal 2008, 2007 and 2006 gross sales, respectively. Beginning in 2005, AFM added a line of
imported accent tables to its product mix to provide customers with complimentary accessory
offering to AFMs core furniture lines. For 2008, 2007 and 2006, accent tables and other
miscellaneous revenue accounted for approximately 3%-4% of gross sales. AFMs core product
offerings with average retail prices are summarized below:
24 styles
of stationary sofas, loveseats and chairs $299 - $499
12 styles of recliners $99 - $399
3 styles of motion sofas $499 - $599
3 styles of stationary sectionals Up to $799
2 styles of motion sectionals $999 - $1,399
AFMs products utilize common components and frames with limited fabric options, allowing AFM
to reproduce established styles at value prices. Since 2004, AFM has introduced 15 new styles
which typically replace older designs and are primarily slight variations to existing products.
AFM builds its products to stock and maintains adequate inventory levels to facilitate
shipment to customers within 48 hours of an order. AFMs quick-ship strategy allows customers
to better manage inventory and product promotions yet maintain the ability to provide immediate
availability to retail customers, a key attribute within the promotional furniture segment of
the furniture industry.
Product
Development
AFM can re-engineer a new design, create a prototype and begin to solicit customer feedback
within two weeks. AFM carefully controls its product line such that new styles typically
replace older designs. As a result, AFM requires approximately 60 days to 90 days to wind-down
a discontinued line and begin shipping truckload quantities of new designs to customers. Since
2004, AFM has introduced 15 new styles.
23
Manufacturing
AFM utilizes an assembly-line manufacturing process with a four day production cycle divided
into four functions, cutting, sewing, backfill and upholstery. Employees are specialized by
function and are compensated on a piece-rate basis. The limited number of styles and designs
minimizes scheduling and line changes and each function is simplified by the use of common
components. AFM uses one standard seat spring, one standard back spring and one standard
cushion in all of its products. AFMs piece-rate compensation plan and streamlined
manufacturing process combine to give AFM a low cost structure
AFMs cycle time requires four days to complete from a manufacturing release date. AFM
synchronizes hardwood milling (from frame components) with fabric cutting and sewing to ensure
that frames and upholstery are ready simultaneously on the production line. AFMs
manufacturing process is further simplified by the application of common parts across all of
its product lines. AFM uses several different lengths of standardized rails, one standard seat
spring, one standard back spring, and one standard type of cushion polyfoam on all sofas,
loveseats and recliners.
AFMs manufacturing process is similar for stationary and motion products, with the exception
of several incremental steps required to insert reclining mechanisms into the motion furniture.
AFMs efficient manufacturing process combined with its inventory strategy is designed to
facilitate AFMs 48-hour quick-ship service covering the entire product line. AFMs expedited
shipping capacity enables retailers to improve inventory turns and reduce lost sales due to
stock-outs. AFMs warehoused inventory is loaded on the delivery truck within 48 hours of
order placement and typically arrives at a customer location within three days of shipping.
AFM delivers the majority of its products through a combination of its in-house trucking fleet
and third-party freight service providers. Freight costs are generally paid by the customer,
including fuel surcharges.
Competitive Strengths
We believe that AFM is among the lowest-cost domestic manufacturers of promotional upholstered
furniture. AFM maintains a competitive cost basis through an assembly-line production model
and build-to-stock strategy. Specifically, AFM generates economies of scale through:
|
|
|
long runs of a limited number of standardized frames; |
|
|
|
|
the application of common components throughout the entire production line; and |
|
|
|
|
a standard offering of only two to four fabric options per frame. |
In addition, management has aligned AFMs high-volume manufacturing strategy with a piece-rate
incentive structure for its direct labor force. This structure drives workforce productivity.
The incentive system also provides floor personnel with the opportunity to earn annual
compensation at or above local standards, thereby facilitating AFMs recruiting and retention
efforts.
AFMs efficient build-to-stock manufacturing operation facilitates AFMs strategy of offering
its customers shipment of product within 48 hours of order receipt. In turn, AFMs customers
are able to offer their retail customers quality, value-priced upholstered furniture for
immediate delivery upon the day of sale, while only maintaining limited quantities of product
inventory.
AFM serves a diverse base of approximately 800 customers. Within its broader customer base,
AFM specifically targets independent furniture retailers at the national, multi-regional and
regional levels. AFMs value proposition and the ability to ship any product within 48 hours,
is highly valued by this segment of the marketplace that focuses broadly on demographic
segments that demand immediate delivery of popular styles at competitive prices.
Barriers to Significant Asian Competition
The availability of low-cost Asian products has had a far-reaching impact on the broader home
furnishings market in the United States over the past ten years. In contrast to manufacturers
serving other segments, AFM has minimal exposure to off-shore competition due to the following:
|
|
|
AFMs efficient, low-cost production model; |
|
|
|
|
mass retailers short lead-time demands and unwillingness to accept excess inventory
risk; and |
|
|
|
|
the high costs (e.g., freight, damage, shrink) of shipping upholstered furniture
direct from Asia. |
24
Business Strategies
|
|
|
Increase sales with new and existing customers |
|
|
|
|
While AFM currently supplies many of the top furniture retailers, AFM believes it can
further augment its customer base and is pursuing new business opportunities with
selected national and regional furniture retailers, as well as in other channels,
including Rent-To-Own (RTO) and mass merchandisers. In addition, many existing
customers currently purchase only a portion of AFMs product line, representing an
opportunity for AFM to increase sales to existing customers by augmenting customers
entire promotional product line. In order to focus additional attention to major
customers and expand productline sell-through to these customers, AFM added significant
infrastructure to its sales and marketing organization since 2005, increasing its sales
representative network while also subdividing sales territories to allow representatives
to focus more closely on the expansion of existing relationships and the addition of new
customers. |
|
|
|
|
Product development |
|
|
|
|
AFMs merchandising strategy focuses on satisfying the changing needs of retailers
and consumers in a manner that meets AFMs production strategy. AFMs management and
sales staff monitor the furniture market to identify new trends and popular styles at
higher price points. AFM subsequently ensures that it can cost-effectively replicate a
new style with standardized components and limited cover options, after which AFM will
build a prototype to determine if the product can be reproduced at acceptable margin
levels. |
|
|
|
|
Asian sourcing of components |
|
|
|
|
In 2004, AFM implemented a program to purchase raw materials from the lowest-cost source
available in the marketplace. The Company hired a director of Asian sourcing in May 2005
to lead this effort. Currently, AFM sources the vast majority of its fabric, legs, show
wood, chaises, ottomans, correlate chairs and accent tables from Asian vendors. AFM
believes there are additional opportunities to lower purchasing costs through this
initiative. |
|
|
|
|
Strategic acquisitions |
|
|
|
|
AFM has in the past and will continue to evaluate strategic acquisitions to augment its
existing business. In particular, acquisitions may provide AFM with an opportunity to
expand geographically, add additional product lines or achieve operational synergies. |
|
|
|
|
Pursue cost savings initiatives |
|
|
|
|
Currently, we are aggressively pursuing expense reduction, cost cutting programs and cash
preservation initiatives throughout all parts of our business. |
Customers
AFM serves a base of approximately 800 customers comprised of retailers and distributors at the
regional, multi-regional and national levels. In 2008, 2007 and 2006, AFMs top 20 customers
accounted for approximately 56%, 50% and 49%, respectively, of AFMs total sales, with the top
customer, Value City, accounting for approximately 22.3%, 18.5% and 19.9% of total sales in
2008, 2007 and 2006, respectively. Other than this customer, no single customer has accounted
for more than 6.5% of total sales in 2008, 2007 and 2006.
Sales and Marketing
AFM has a sales force consisting of 15 independent, outside representatives that exclusively
sell AFMs products in an assigned geographic territory of up to six states. Sales
representatives are compensated on a 100% commission basis. AFM maintains two permanent
showrooms in High Point, North Carolina and Tupelo, Mississippi, host cities for furniture
industry trade shows (High Point in April and October and Tupelo in January and August). In
addition, AFM leases showroom space for the furniture trade show in Las Vegas, Nevada. Trade
shows provide opportunities for AFM to display its existing products and introduce new designs
into the marketplace.
American Furnitures business is somewhat seasonal. Net sales have historically been higher in
the fiscal quarters ended June and December. We believe this seasonality is due in part to
consumer demand increasing resulting from income tax refunds and the
holiday season. Substantially all revenue is derived from sales within the United States.
25
AFM had approximately $4.7 million and $5.1 million in firm backlog orders at December 31, 2008
and 2007, respectively.
Marketing at the retail level is typically handled by AFMs customers. AFM does not advertise
specific products on its own, but provides product information and pictures for retailers to
include in newspaper and various insert advertisements. AFMs products are typically included
in retailers recurring promotional programs as the products drive floor traffic and sales
volume due to low price points.
Competition
AFM competes with certain large national manufacturers that produce and sell promotional
products. However, promotional upholstered furniture often represents only a small percentage
of revenue for these participants. Also, large diversified manufacturers tend not to place
specific emphasis on developing quick-ship capabilities specifically for their promotional
offerings. Therefore, AFM competes primarily with several smaller manufacturers that are
typically thinly-capitalized, family owned businesses that we believe do not have the capacity,
manufacturing capabilities, sourcing expertise or access to capital in order to build critical
production volumes. Competition within the segment is largely based on value and delivery lead
times, as opposed to product differentiation, providing AFM and its quick-ship capabilities
with a key competitive advantage within the industry. AFMs primary competitors include United
Furniture Industries, Albany Industries and Hughes Furniture, among others.
Suppliers
AFMs top supplier, Independent Furniture Supply (Independent), is 50% owned by Mike Thomas,
AFMs CEO. AFM purchases polyfoam from Independent on an arms-length basis and AFM performs
regular audits to verify market pricing. AFM does not have long-term supply contracts with
Independent or any other suppliers. A majority of AFMs domestic suppliers are located near
AFM due to a concentration of furniture manufacturers in northeastern Mississippi. Several of
AFMs key raw materials, including lumber, plywood and polyfoam, are sourced locally with
alternative suppliers available at competitive prices, if necessary. In order to continually
manage material costs, AFM actively sources products from Asia. AFM imports legs, show wood,
chaises, ottomans, correlate chairs, accent tables and the majority of its fabric from
China-based suppliers. The manufacturers of products such as petro-chemicals and wire rod,
which are the materials purchased by our suppliers of foam and drawn wire have declined
slightly beginning in the fourth quarter of 2008. It is too early to determine if we will
realize a like kind reduction in our raw material costs in 2009 as our vendors may reduce
supplies in an effort to maintain higher prices. These actions would delay or eliminate price
reductions from our suppliers. Raw material cost as a percent of sales was approximately 59%,
58% and 59% in 2008, 2007 and 2006, respectively.
Regulatory Environment
AFMs manufacturing operations, facilities and operations are subject to evolving federal,
state and local environmental and occupational health and safety laws and regulations. Such
laws and regulations govern air emissions, wastewater discharge and the storage and handling of
chemicals and hazardous substances. AFM believes that it is in compliance, in all material
respects, with applicable environmental and occupational health and safety laws and
regulations. New requirements, more stringent application of existing requirements, or
discovery of previously unknown environmental conditions may result in material environmental
expenditures in the future
Employees
As of December 31, 2008, American Furniture employed 950 persons. Of these employees,
approximately 857 were in production, shipping and trucking, 15 were in sales with the
remainder serving in executive and administrative functions. None of AFMs employees are
subject to collective bargaining agreements. We believe that AFMs relationship with its
employees is good.
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Anodyne
Overview
Anodyne, with operations headquartered in Coral Springs, Florida, is a leading designer and
manufacturer of medical support surfaces and patient positioning devices serving the acute
care, long-term care and home health care markets.
The Anodyne group of companies includes SenTech Medical Systems (SenTech), AMF Support
Surfaces (AMF), PrimaTech Medical Systems (PrimaTech) and Anatomic Concepts (Anatomic).
Anodynes consolidation of these companies marks the medical support surface industrys first
opportunity to source all leading product technologies from a single vendor.
Anodyne develops products both independently and in partnership with large distribution
intermediaries. Medical distribution companies then sell or rent the support surfaces in
conjunction with bed frames and accessories to one of three end markets: (i) hospitals, (ii)
long term care facilities and (iii) home health care organizations. The level of
sophistication largely varies for each product, as some customers require simple foam mattress
beds while others may require electronically controlled, low air loss, lateral rotation,
pulmonary therapy or alternating pressure air beds. The design, engineering and manufacturing
of all products are completed in-house (with the exception of PrimaTech, products, which are
manufactured in Taiwan) and are Food and Drug Administration
(FDA) compliant. Additional information is available at www.anodynemedicaldevice.com.
For the full fiscal years ended December 31, 2008, 2007 and 2006, Anodyne had net sales of
approximately $54.2 million $44.2 million and $23.4 million, and operating income of $4.2
million, $2.9 million and $0.3 million, respectively. Anodyne had total assets of $53.2
million as of December 31, 2008. Net sales from Anodyne represented 3.5%, 5.2% and 3.1% of our
consolidated net sales for fiscal years 2008, 2007 and 2006, respectively.
History
Anodyne was initially formed in February 2006 by CGI and Hollywood Capital, Inc., a private
investment management firm led by Anodynes former Chief Executive Officer, to acquire AMF and
SenTech located in Corona, CA and Coral Springs, FL, respectively. AMF Support Surfaces, Inc.
is a leading manufacturer of non-powered mattress systems, seating cushions and patient
positing devices. SenTech is a leading designer and manufacturer of advanced electronically
controlled, alternating pressure pulmonary therapy, low air loss and lateral rotation specialty
support surfaces for the wound care industry. Prior to its acquisition SenTech had established
a premium brand in the less price sensitive therapeutic market while AMF competed primarily in
the preventive care market.
On October 5, 2006, Anodyne acquired the patient positioning device business of Anatomic. The
acquired operations were merged into Anodynes operations. Anatomic is a leading supplier of
operating suite patient positioning devices and support surfaces focused on the price sensitive
long term care and home healthcare markets.
On June 27, 2007, Anodyne purchased PrimaTech, a lower price-point distributor of medical
support surfaces to the long term care and home healthcare markets. PrimaTechs products are
designed in the US and manufactured pursuant to an exclusive manufacturing agreement with an
FDA registered manufacturing partner located in Taiwan.
In October 2008, Anodyne and Hollywood Capital, Inc terminated their management services
agreement which provided for, among other things, two principals of Hollywood Capital, Inc.,
assuming the roles of Chief Executive Officer and Chief Financial Officer of Anodyne. Upon
termination of the agreement, Anodyne appointed a new Chief Executive Officer and a new Chief
Financial Officer.
We acquired a controlling interest in Anodyne on August 1, 2006.
Industry
The medical support surfaces industry is fragmented and comprised of many small participants
and niche manufacturers. Anodynes consolidation platform allows customers to source all
leading support surface technologies for the acute care, long term care and home health care
from a single source. Anodyne is a
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vertically integrated company with engineering, design and research, manufacturing and support
performed in house to quickly bring new products to market and maintain strict quality.
Immobility caused by injury, old age, chronic illness or obesity is the main cause for the
development of pressure ulcers. In these cases, the person lying in the same position for a
long period of time puts pressure on the bony prominence of the body surface. This pressure,
if continued for a sustained period, can close blood capillaries that provide oxygen and
nutrition to the skin. Over a period of time, these cells deprived of oxygen, begin to break
down and form sores. In addition to constant or excessive pressure, other contributing factors
to the development of pressure ulcers include heat, friction and sheer, or pull on the skin due
to the underlying fabric.
The U.S. market for specialty beds and medical support surfaces was estimated to be $2.0
billion in 2008. Management believes the need for medical support surfaces will continue to
grow due to several favorable demographic and industry trends including the increasing
incidence of obesity in the United States, increasing life expectancies, and an increasing
emphasis on prevention of pressure ulcers by hospitals and long term care facilities.
According to the Centers for Disease Control and Prevention, between the years 1980 and 2000,
obesity rates more than doubled among adults in the United States. Studies have shown that
this increase in obesity has been a key factor in rising medical costs over the last 15 years.
According to one study done at Emory University, increases in obesity rates 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 healthcare institutions are
placing an increased emphasis on the prevention of pressure ulcers. Frost and Sullivan
estimated 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, healthcare institutions are now focusing on using pressure relief
equipment to reduce the incidence of in-house acquired pressure ulcers.
Products and Services
Specialty beds, mattress replacements and mattress overlays (i.e. support surfaces) are the
primary products currently available for pressure relief and pressure reduction to treat and
prevent decubitus ulcers. The market for specialty beds and support surfaces include the acute
care centers, long-term care centers, nursing home centers and home healthcare settings.
Medical support surfaces are designed to have preventative and/or therapeutic uses. The basic
product categories are as follows:
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Powered Support Surfaces: Mattresses which can be used for therapy or prevention
and are typically manufactured using an electronic power source with air cylinders or
a combination of air cylinders and foam and provide either Alternating Pressure or Low
Air Loss. Alternating Pressure Systems are designed to inflate alternate cylinders
while contiguous cylinders deflate in an alternating pattern. The alternating
inflation and deflation prevents sustained pressure on an area of skin by shifting
pressure from one area to another. This type of therapy provides movement under the
patients skin to eliminate both excessive and constant pressure, the leading cause of
bed sores. The powered control unit provides automatic changes in the distribution of
air pressure. Another typical type of powered surface is Low Air Loss Mattresses that
allow air to flow from the mattress and address the moisture and temperature
environment on the patients skin, contributing factors to bed sores. Low air loss
systems may provide additional features such as controlled air leakage, which reduces
skin moisture levels, and alternating pressure or 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 provides the only low air loss product on the
market that gets air to the patients skin directly through a patented process. Powered
support surfaces are typically used in acute care settings and when more aggressive
therapy is needed. |
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Non-Powered Support Surfaces: Consists of mattresses which have no powered
elements. Their support material can be composed of foam, air, water, gel or a
combination of these. In the case of water, air or gel materials, they are held in
place with containment bladders. Non-powered mattress replacement systems help
redistribute a patients body weight to lessen forces on pressure points by
envelopment into the surface. These products currently comprise the majority of
support surfaces. Currently, Anodyne manufactures a broad range of non-powered
mattress systems using air, foam and gel. |
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Positioning devices: Positioning devices are used to position patients for
procedures as well as to minimize the likelihood of developing a pressure ulcer during
those procedures. Anodyne offers a complete range of foam positioning devices. |
Competition
The competition in the medical support surfaces market is based predominantly 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 manufacturers of varying sizes who then sell predominantly through
distributors to the acute care, long term care and home health care markets. Specific
competitors include Gaymar Industries, Inc., Span America and other smaller competitors.
Anodyne differentiates itself from these competitors based on the quality of the products it
manufacturers as well as its design capabilities to produce a full line of foam and air
mattresses and positioning devices. 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
nationwide
The companies listed below have been identified by management as Anodynes primary competitors.
Gaymar Industries, Inc.: Gaymar, a portfolio company of private equity firm Nautic
Partners, develops, manufactures and markets medical devices for temperature and pressure ulcer
management. Gaymars pressure ulcer management system includes integrated bed systems,
mattress replacement systems, pressure relieving overlays, lateral rotation systems, table and
stretcher pads, chair cushions and heel care devices.
Span America Medical Systems (NASDAQ: SPAN): ($59.3 million in fiscal 2008 sales) Span
Americas medical division predominantly makes foam mattress overlays and replacement
mattresses, including the PressureGuard therapeutic mattress, Span-Aid patient positioners
(used to elevate and support body parts) and Dish pressure-relief seat cushions to aid wound
healing. Span America also supplies safety catheters and makes specialty packaging products
for use in outdoor furniture.
Business Strategies
Anodynes management is focused on strategies to grow revenues, improve operating efficiency
and improving gross margins. Of particular note, Anodyne has completed four acquisitions since
its inception and 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 technologically advanced. Anodynes
management believes that many smaller competitors do not have the resources required
to effectively meet the changing needs of their
customers and believes that increased scale 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 Many
of the products used to manufacture medical support surfaces are standard in nature
and management believes that increased scale achieved through acquisitions will allow
it to benefit from lower cost of materials and therefore lower cost of sales. In
addition, management believes that there are opportunities to improve the operations
of smaller acquired entities and in turn benefit from these efficiencies. |
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.
Anodyne increasingly works with large distributors to develop the next generation of products,
effectively positioning and integrating itself within their customers research and development
initiatives. The customers demand innovative products with clinical efficacy at competitive
price points. The new product development process often requires 2-4 months for prevention
products and 12-18 months for treatment products, of research, engineering and testing
cooperation. Anodyne will provide technical support and repair services for its products as
well, a differentiating characteristic valued by its customers. During the years 2008, 2007
and 2006 Anodyne incurred $0.9 million, $0.9 million and $0.7 million in research and
development costs.
Customers
Support surfaces are primarily sold through distributors, who either rent or sell to acute care
(hospitals) facilities, long term care facilities and home health care organizations. The
acute care distribution market for support surfaces is dominated by large suppliers such as
Stryker Corporation, Hill-Rom Holdings Inc. and Kinetic Concepts, Inc. Other national
distributors usually provide specific types of support surface technology. Beyond national
distribution intermediaries there are numerous smaller local distributors who will purchase
more standardized support surfaces from Anodyne as quantities ordered may not be adequate to
justify further development and customization.
Anodyne has developed a full range of support surface products that are sold or rented to
healthcare distributors and occasionally sold directly to the end customer. Anodyne also
provides technical support and repair services for its products, an offering valued by all
customers. While contracts with large distributors typically do not include minimum purchase
orders, agreements typically call for rolling forecasts of orders to be given at the end of
each month for the following three months.
Sales and Marketing
Approximately 20% and 22% of Anodynes sales have been to one customer in 2008 and 2007,
respectively. Anodynes top ten customers accounted for 76.9%, 72.9% and 70.9% of gross sales
in 2008, 2007 and 2006, respectively.
Substantially all revenue is derived from sales within the United States.
Anodyne had approximately $1.7 million in firm backlog orders at December 31, 2008. Backlog order
data is not available for 2007.
Suppliers
Anodynes two primary raw materials used in manufacturing are polyurethane foam and fabric
(primarily nylon and polycarbonate fabrics). Among Anodynes largest raw material suppliers
are Foamex International, Inc., Dartex Coatings, Inc. and Uretek, LLC. Anodyne uses multiple
suppliers for foam and fabric and believes that these raw materials are in adequate supply and
are available from many suppliers at competitive prices. We expect these costs, particularly
those related to polyurethane foam to decrease during fiscal 2009 due to an expected decline
in related commodity prices. Actions taken by manufacturers of petro-chemical commodities
such as capacity reductions could delay or eliminate price reductions from our suppliers.
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Intellectual Property
Anodyne has seven patents issued, filed from 1996 to 2005, and has seven filed and pending
patents.
Regulatory Environment
The Federal Food, Drug and Cosmetic Act (the FDCA), and regulations issued or proposed there
under, provide for regulation by the FDA of the marketing, manufacture, labeling, packaging and
distribution of medial devices, including Anodynes products. These regulations require, among
other things that medical device manufacturers register with the FDA, list devices manufactured
by them, and file various inspections by regulatory authorities and must comply with good
manufacturing practices as required by the FDA and state regulatory authorities. Anodynes
management believes that the company is in substantial compliance with all applicable
regulations.
Employees
As of December 31, 2008, Anodyne employed 174 persons in all its locations. In addition, there
were 227 leased employees consisting primarily of production employees. None of Anodynes
employees are subject to collective bargaining agreements. We believe that Anodynes
relationship with its employees is good.
CBS Personnel
Overview
CBS Personnel, headquartered in Cincinnati, Ohio, is a provider of temporary staffing services
in the United States. CBS Personnel currently operates under the brand names CBS Personnel,
Staffmark, and Venturi Staffing Partners, (see Rebranding of CBS Personnel). CBS Personnel
also provides its clients with other complementary human resource service offerings such as
employee leasing services, permanent staffing and temporary-to-permanent placement services.
CBS Personnel operated more than 260 branch locations in various cities in 29 states during
2008. CBS Personnel and its subsidiaries have been associated with quality service in their
markets for more than 30 years. CBS Personnel is one of the top 10 commercial staffing
companies in the United States. CBS Personnel acquired Staffmark, a large privately held
provider of temporary staffing services in January 2008.
CBS Personnel serves over 6,500 corporate and small business clients and on an average week
places over 38,000 temporary employees in a broad range of industries, including manufacturing,
transportation, retail, distribution, warehousing, automotive supply, and construction,
industrial, healthcare and financial sectors. We believe the quality of CBS Personnels branch
operations and its strong sales force provides CBS Personnel with a competitive advantage over
other placement services. CBS Personnels senior management, collectively, has over 80 years
of experience in the human resource outsourcing industry and other closely related industries. Additional information is available at www.staffmark.com.
For each of the fiscal years ended December 31, 2008, 2007 and 2006, CBS Personnel had revenues
totaling approximately $1,006 million, $569.9 million and $551.1 million, and operating income
of $16.8 million, $22.5 million and $23.2 million. CBS Personnel had total assets of $329.4
million at December 31, 2008. Revenues from CBS Personnel represented 65.4%, 67.7% and 89.2%
of our total revenues for 2008, 2007 and 2006, respectively.
History of CBS Personnel
In August 1999, CGI acquired Columbia Staffing through a newly formed holding company. Columbia
Staffing is a provider of light industrial, clerical, medical, and technical personnel to
clients throughout the southeast. In October 2000, CGI acquired through the same holding
company CBS Personnel Services, Inc, a Cincinnati-based provider of human resources
outsourcing. CBS Personnel Services, Inc. began operations in 1971 and is a provider of
temporary staffing services in Ohio, Kentucky and Indiana, with a particularly strong presence
in the metropolitan markets of Cincinnati, Dayton, Columbus, Lexington, Louisville, and
Indianapolis. The name of the holding company that made these acquisitions was later changed
to CBS Personnel Holdings, Inc.
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In 2004, CBS Personnel expanded geographically through the acquisition of Venturi Staffing
Partners (VSP), formerly a wholly owned subsidiary of Venturi Partners Inc. VSP is a
provider of temporary staffing, temp-to-hire and permanent placement services operating through
branch offices located primarily in economically diverse metropolitan markets including Boston,
New York, Atlanta, Charlotte, Houston and Dallas, as well as both Southern and Northern
California. Approximately 60% of VSPs temporary staffing revenue related to the clerical
staffing, 24% related to light industrial staffing and the remaining 16% related to
niche/other. Based on its geographic presence, VSP was a complementary acquisition for CBS
Personnel as their combined operations did not overlap and the merger created a more national
presence for CBS Personnel.
In November 2006, CBS Personnel acquired substantially all of the assets of Strategic Edge
Solutions (SES). This acquisition gave CBS Personnel a presence in the Baltimore, MD area
while significantly increasing its presence in the Chicago, IL area. SES derives the majority
of its revenues from the light industrial market.
On January 21, 2008, CBS Personnel acquired Staffmark and Staffmark became a wholly-owned
subsidiary of CBS Personnel. Staffmark is a leading provider of commercial staffing services
in the United States. Staffmark provided staffing services in over 30 states through more than
200 branches and on-site locations. The majority of Staffmarks revenues are derived from
light industrial staffing, with the balance of revenues derived from administrative and
transportation staffing, permanent placement services and managed solutions. Similar to CBS
Personnel, Staffmark was one of the largest privately held staffing companies in the United
States.
We acquired a majority interest in CBS Personnel on May 16, 2006.
Industry
According to Staffing Industry Analysts, Inc., the staffing industry generated approximately
$132.5 billion in revenues in 2007. The staffing industry is comprised of four product lines:
(i) temporary staffing; (ii) employee leasing; (iii) permanent placement; and (iv)
outplacement, representing approximately 75.0%, 9.0%, 15.0% and 1% of the market, respectively.
The temporary staffing business grew by 4% in 2007 according to Staffing Industry Analysts,
Inc. Over 98% of CBS Personnels revenues are generated through temporary staffing.
CBS Personnel competes largely in the light industrial and clerical categories of the temporary
staffing industry. The light industrial category is comprised of unskilled and semi-skilled
workers in manufacturing, distribution, logistics and other similar industries. The clerical
category is comprised of administrative personnel, data entry professionals, call center
employees, receptionists, clerks and similar employees.
According to the U.S. Bureau of Labor Statistics, or BLS, net employment in professional and
business services super sector, (which includes staffing), has grown by approximately 55% from
1992 to 2008. Further, BLS has projected that the employment services sector is expected to be
the second fastest growing sector of the economy for employment growth between 2006 and 2016.
Companies today are operating in a more global and competitive environment, which requires them
to respond quickly to fluctuating demand for their products and services. As a result,
companies seek greater workforce flexibility translating to an increasing demand for temporary
staffing services. We believe this growing demand for temporary staffing should remain
consistent in the near future as temporary staffing becomes an integral component of corporate
human capital strategy.
Fiscal 2008 was a very difficult year for the temporary staffing industry. The already weak
economic conditions and employment trends in the U.S., present at the start of 2008, continued
to worsen as the year progressed. The most notable deterioration occurred in the fourth
quarter of 2008 as the economic slowdown continued. We believe the industry will continue to
experience deterioration in temporary staffing through fiscal 2009.
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Services
CBS Personnel provides temporary staffing services tailored to meet each clients unique
staffing requirements. CBS Personnel maintains a strong reputation in its markets for
providing complete staffing services that includes both high quality candidates and superior
client service. CBS Personnels management believes it is one of only a few staffing services
companies in each of its markets that is capable of fulfilling
the staffing requirements of both small, local clients and larger, regional or national
accounts. To position itself as a key provider of human resources to its clients, CBS
Personnel has developed an approach to service that focuses on:
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providing excellent service to existing clients in a consistent and efficient
manner; |
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cross selling service offerings to existing clients to increase revenue per client; |
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marketing services to prospective clients to expand the client base; and |
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providing incentives to employees through well-balanced incentive and bonus plans
to encourage increased sales per client and the establishment of new client
relationships. |
CBS Personnel offers its clients a broad range of staffing services including the following:
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temporary staffing services in categories such as light industrial, clerical,
healthcare, construction, transportation, professional and technical staffing; |
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employee leasing and related administrative services; and |
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temporary-to-permanent and permanent placement services. |
Temporary Staffing Services
CBS Personnel endeavors to understand and address the individual staffing needs of its clients
and has the ability to serve a wide variety of clients, from small companies with specific
personnel needs to large companies with extensive and varied requirements. CBS Personnel
devotes significant resources to the development of customized programs designed to fulfill the
clients need for certain services with quality personnel in a prompt and efficient manner.
CBS Personnels primary temporary staffing categories are described below.
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Light Industrial A substantial portion of CBS Personnels temporary staffing
revenues are derived from the placement of low-to mid-skilled temporary workers in the
light industrial category, which comprises primarily the distribution (pick-and-pack)
and light manufacturing (such as assembly-line work in factories) sectors of the
economy. Approximately 71%, 58% and 50% of CBS Personnels temporary staffing revenues
were derived from light industrial in the years 2008, 2007 and 2006, respectively. |
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Clerical CBS Personnel provides clerical workers that have been screened,
reference-checked and tested for computer ability, typing speed, word processing and
data entry capabilities. Clerical workers are often employed at client call centers and
corporate offices. Approximately 21%, 31% and 37% of CBS Personnels temporary
staffing revenues were derived from clerical in the years 2008, 2007 and 2006
respectively. |
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The increase in percent of revenue in light industrial in 2008 and corresponding
decrease in clerical, are due to the revenue impact of Staffmark in 2008. Staffmarks
temporary staffing is principally light industrial. |
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Technical CBS Personnel provides placement candidates in a variety of skilled
technical capacities, including plant managers, engineering management, operations
managers, designers, draftsmen, engineers, materials management, line supervisors,
electronic assemblers, laboratory assistants and quality control personnel.
Approximately 3%, 3% and 4% of CBS Personnels temporary staffing revenues were derived
from technical for the fiscal years ended December 31, 2008, 2007 and 2006,
respectively. |
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Healthcare Through its expert placement agents in its Columbia Healthcare
division, CBS Personnel provides trained candidates in the following healthcare
categories: medical office personnel, medical technicians, rehabilitation
professionals, management and administrative personnel and radiology technicians, among
others. Approximately 1% of CBS Personnels temporary staffing revenues were derived
from healthcare for the fiscal year ended December 31, 2008 and 2% of CBS Personnels
temporary staffing revenues were derived from healthcare in the years 2007 and 2006. |
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Niche/Other In addition to the light industrial, clerical, healthcare and
technical categories, CBS Personnel also provides certain niche staffing services,
placing candidates in the skilled industrial,
construction and transportation sectors, among others. CBS Personnels wide array of
niche service offerings allows it to meet a broad range of client needs. Moreover,
these niche services typically generate higher margins for CBS Personnel. Approximately
4%, 6% and 7% of CBS Personnels temporary staffing revenues were derived from
niche/other for the fiscal years ended December 31, 2008, 2007 and 2006, respectively. |
As part of its service offerings, CBS Personnel provides an on-site program to clients
employing, generally 50 to 75, or more of its temporary employees. The on-site program manager
works full-time at the clients location to help manage the clients temporary staffing and
related human resources needs and provides detailed administrative support and reporting
systems, which reduce the clients workload and costs while allowing its management to focus on
increasing productivity and revenues. CBS Personnels management believes this on-site program
offering creates strong relationships with its clients by providing consistency and quality in
the management of clients human resources and administrative functions. In addition, through
its on-site program, CBS Personnel often gains visibility into the demand for temporary
staffing services in new markets, which has helped management identify possible areas for
geographic expansion.
Employee Leasing Services
Employee Leasing Services while accounting for less than 2% of CBS Personnels total revenue
provides a valuable complementary product offering to its temporary staffing services. Through
the employee leasing and administrative service offerings of its Employee Management Services,
or EMS, division, CBS Personnel provides administrative services, handling the clients
payroll, risk management, unemployment services, human resources support and employee benefit
programs, which in turn results in reduced administrative requirements for employers and, most
importantly, by having EMS take over the non-productive administrative burdens of an
organization, affords clients the ability to focus on their core businesses.
EMS also offers a full line of benefits for employers to provide to their employees, including
medical, dental, vision, disability, life insurance, 401(k) retirement and other premium
options. As a result of economies of scale, clients are offered multiple plan and premium
options at affordable rates. CBS Personnels clients have the flexibility to determine what
benefits to offer and how to implement the program in order to attract more qualified employees
Temporary-to-Permanent and Permanent Staffing Services
Complementary to its temporary staffing and employee leasing services, CBS Personnel offers
temporary-to-permanent and permanent placement services, often as a result of requests made
through its temporary staffing activities. In addition, temporary workers will sometimes be
hired on a permanent basis by the clients to whom they are assigned. CBS Personnel earns fees
for permanent placements, in addition to the revenues generated from providing these workers on
a temporary basis before they are hired as permanent employees.
Competitive Strengths
CBS Personnel has established itself as strong and dependable providers of staffing and other
resource services by responding to its customers staffing needs in a timely and cost effective
manner. A key to CBS Personnels success has been its long history as well as the number of
offices it operates in each of its markets. This strategy has allowed CBS Personnel to build a
premium reputation in each of its markets and has resulted in the following competitive
strengths:
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Large Employee Database/Customer List Over the course of its history, CBS
Personnels management believes CBS Personnel has built a significant presence in most
of its markets in terms of both clients and employees. CBS Personnel is successful in
recruiting additional employees because of its reputation as having numerous job
openings with a wide variety of clients. CBS Personnel attracts clients due in part to
its large database of reliable employees with wide ranging skill sets. CBS Personnels
employee database and client list have been built over a number of years in each of its
markets and serve as a major competitive strength in most of its markets. |
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Higher Operating Margins By establishing multiple offices in the majority of the
markets in which it operates, CBS Personnel is able to better leverage its selling,
general and administrative expenses at the regional and field level and create higher
operating income margins than its less dense competitors. |
34
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Scalable Business Model By having multiple office locations in each of its
markets, CBS Personnel is able to quickly scale its business model in both good and bad
economic environments. For example, in 2001 and 2002 during the economic downturn, CBS
Personnel was able to close offices and reduce overhead expenses while shifting
business to adjacent offices. For competitors with only one office per market, closing
an office requires abandoning the clients and employees in that market. During 2001
and 2002, CBS Personnel was able to reduce its overhead costs by approximately 13%
while maintaining its presence in each of its markets and retaining its clients and
employees. In response to the current economic downturn, CBS Personnel is enacting a
similar strategy as was executed previously. This includes reducing costs and closing
offices. CBS Personnel is capitalizing on synergies from the Staffmark acquisition,
which allows for further contraction of offices and reduction of costs without
abandoning clients or employees in markets. |
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Marketing Synergies By having a number of offices in the majority of its
markets, CBS Personnel allocates additional resources to marketing and selling and
amortizes those costs over a larger office network. For example, while many of its
competitors use selling branch managers who split time between operations and sales,
CBS Personnel uses outside sales reps that are exclusively focused on bringing in new
sales. |
Business Strategies
CBS Personnels business strategy is to (i) leverage its position in its existing markets, (ii)
build a presence in contiguous markets, and (iii) continued restructuring of post-acquisition
operations and reducing discretionary spending, and (iv) pursue and selectively acquire other
staffing resource providers.
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Invest in its Existing Markets In many of its existing markets, CBS Personnel
has multiple branch locations. CBS Personnel plans on continuing to invest in these
existing markets through the opening of additional branch locations and the hiring of
additional sales and operations employees when it is economically prudent to do so. In
addition, CBS personnel is offering complementary human resource services to its
existing clients such as full time recruiting, consulting, and administrative
outsourcing. CBS Personnel has implemented an incentive plan that highly rewards its
employees for selling services beyond its traditional temporary staffing services. |
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Build a Presence in Contiguous Markets CBS Personnel plans on opening new branch
locations in markets contiguous to those in which it operates when it is economically
prudent. CBS Personnel believes that the cost and time required to establish
profitable branch locations is minimized through expansion into contiguous markets as
costs associated with advertising and administrative overhead are reduced due to
proximity. |
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Continued restructuring and cost reductions As a result of the current economic
downturn, CBS Personnel is reducing costs and closing offices. The Staffmark
acquisition provides a larger footprint that allows CBS Personnel to close offices and
reduce costs while still continuing to service its clients and employees in its
existing markets. |
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Pursue Selective Acquisitions CBS Personnel views acquisitions, such as the SES
acquisition in November 2006 and Staffmark in January 2008, as attractive means to
enter into a new geographical market, and in the case of Staffmark, increasing its market share
in existing markets, when economically prudent. |
Clients
CBS Personnel serves over 6,500 clients in a broad range of industries, including
manufacturing, technical, transportation, retail, distribution, warehousing, automotive supply,
construction, industrial, healthcare services and financial. These clients range in size from
small, local firms to large, regional or national corporations. CBS Personnels largest
client, R.R. Donnelley, accounted for approximately 4.8% of gross revenues in 2008 and CBS
Personnels top ten clients accounted for approximately 21.5% of gross revenues in 2008. CBS
Personnels client assignments can vary from a period of a few days to long-term, annual or
multi-year contracts. We believe CBS Personnel has a strong relationship with its clients.
35
Sales, Marketing and Recruiting Efforts
CBS Personnels marketing efforts are principally focused on branch-level development of local
business relationships. Local salespeople are incentivized to recruit new clients and increase
usage by existing clients through their compensation programs, as well as through numerous
contests and competitions. Regional or
Company-based specialists are utilized to assist local salespeople in closing potentially large
accounts, particularly where they may involve an on-site presence by CBS Personnel. On a
regional and national level, efforts are made to expand and align its services to fulfill the
needs of clients with multiple locations, which may also include using on-site CBS Personnel
professionals and the opening of additional offices to better serve a clients broader
geographic needs.
CBS Personnel actively recruits in each community in which it operates, through educational
institutions, evening and weekend interviewing and open houses. At the corporate level, CBS
Personnel maintains an in-house web-based job posting and resume process which facilitates
distribution of job descriptions to national and local online job boards. Individuals may also
submit a resume through CBS Personnels website.
At each branch location, local salespeople are incentivized to recruit new clients and increase
usage by existing clients through their compensation programs, as well as through numerous
contests and competitions. Regional or company-based marketing specialists are utilized to
assist local salespeople in closing potentially large accounts, particularly when it may
involve an on-site presence by CBS Personnel.
On an initial engagement, particularly for clients with larger temporary staffing assignments
(10+ temporary workers), a CBS Personnel staff member will arrive on-site to register all
employees hired for a particular assignment. If, for any reason, not all employees assigned to
the job site arrive, the on-site CBS Personnel staff member can immediately react and
oftentimes correct the shortfall within a matter of hours, ensuring that 100% of a clients
staffing needs are fulfilled.
CBS Personnels marketing activities are designed to effectively service and reach all current
and prospective clients at the local, regional and national level, resulting in brand
recognition and loyalty throughout many levels of a clients organization.
Following a prospective employees identification, CBS Personnel systematically evaluates each
candidate prior to placement. The employee application process includes an interview, skills
assessment test, education verification and reference verification, and may include drug
screening and background checks depending upon customer requirements.
CBSs business is somewhat seasonal. Historically, demand for temporary staffing is highest
during the fiscal quarters ending September and December. We believe this seasonality is due
to increased outdoor activities and projects during the summer months and the increased retail
activity during the holiday season.
Substantially all revenue is derived from sales within the United States.
Competition
The temporary staffing industry is highly fragmented and, according to the U.S. Census Bureau
in 2006, was comprised of approximately 11,900 service providers. According to the Census
Bureaus latest Economic Census in 2002, the vast majority of service providers generate less
than $10 million in annual revenues. Staffing services firms with more than 10 establishments
account for only 1.6% of the total number of service providers, or 187 companies, but generate
49.3% of revenues in the temporary staffing industry. The largest publicly owned companies
specializing in temporary staffing services are Adecco, Kelly Services Inc. and Manpower.
The employee leasing industry consists of approximately 4,500 service providers. Our largest
national competitors in employee leasing include Administaff, Inc., Gevity HR, and the employee
leasing divisions of large business service companies such as Automatic Data Processing, Inc.,
and Paychex, Inc.
CBS Personnel competes with both large national and small, local staffing companies in its
markets for clients. Competition in the temporary staffing industry revolves around quality of
service, reputation and price. Notwithstanding this level of competition, CBS Personnels
management believes CBS Personnel benefits from a number of competitive advantages, including:
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multiple offices in its core markets; |
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long-standing relationships with its clients; |
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a large database of qualified temporary workers which enables CBS Personnel to fill
orders rapidly; |
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well-recognized brands and leadership positions in its core markets; and |
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a reputation for treating employees well and offering competitive benefits. |
36
Numerous competitors, both large and small, have exited or significantly reduced their presence
in many of CBS Personnels markets. CBS Personnels management believes that this trend has
resulted from the increasing importance of scale, client demands for broader services and
reduced costs, and the difficulty that the strong positions of market leaders, such as CBS
Personnel, present for competitors attempting to grow their client base.
Historically, in periods of economic prosperity, the number of firms providing temporary
services has increased significantly due to the combination of a favorable economic climate and
low barriers to entry. Recessionary periods generally result in a reduction in the number of
competitors through consolidation and closures; however, historically this reduction has proven
to be for a limited time as the following periods of economic recovery have led to a return in
growth in the number of competitors.
Due to the difficult current economic environment that arose in the latter half of 2008, we
believe many of our smaller, local competitors will struggle and we anticipate further
consolidation in the near term. We view this as an opportunity to increase our market share in
2009 and beyond.
CBS Personnel also competes for qualified employee candidates in each of the markets in which
it operates. Management believes that CBS Personnels scale and concentration in each of its
markets provides it with recruiting advantages. Key among the factors affecting a candidates
choice of employers is the likelihood of reassignment following the completion of an initial
engagement. CBS Personnel typically has numerous clients with significantly different hiring
patterns in each of its markets, increasing the likelihood that it can reassign individual
employees and limit the amount of time an employee is in transition. As employee referrals are
a key component of its recruiting efforts, management believes local market share is also key
to its ability to identify qualified candidates.
Trade names
CBS Personnel uses the following tradenames: CBS Personnel TM, CBS
Personnel Services TM, Columbia Staffing TM, Columbia
Healthcare Services TM, Venturi Staffing Partners TM
and Staffmark TM. We believe these trade names have strong brand equity in
their markets and have significant value to CBS Personnels business.
37
Facilities
CBS Personnel, headquartered in Cincinnati, Ohio, currently provides staffing services through
its 233 branch offices located in 28 states. Average revenue per branch was approximately $3.5
million in 2008 and 89% of the branches were profitable. CBS Personnel also operated on-site
locations, which accounted for approximately $200 million in revenues in 2008. The following
table shows the number of branch offices located in each state in which CBS Personnel operates
and the employee hours billed by branch offices and on-site locations for the fiscal year ended
December 31, 2008. This table excludes approximately 64,000 employee hours billed by branches
that were closed in 2008, in which the hours were not absorbed by another CBS branch.
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Employee |
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Number of |
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Hours |
State |
|
Branch Offices |
|
Billed (000s) |
CA |
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35 |
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8,777 |
|
OH |
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27 |
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10,300 |
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TN |
|
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18 |
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11,134 |
|
AR |
|
|
17 |
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|
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5,361 |
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TX |
|
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16 |
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|
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5,868 |
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KY |
|
|
14 |
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|
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3,447 |
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NC |
|
|
12 |
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|
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3,368 |
|
PA |
|
|
11 |
|
|
|
3,041 |
|
IL |
|
|
10 |
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|
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3,175 |
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IN |
|
|
10 |
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2,842 |
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GA |
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9 |
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3,162 |
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SC |
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9 |
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2,033 |
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MD |
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5 |
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312 |
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MA |
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|
4 |
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1,531 |
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VA |
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4 |
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1,430 |
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NV |
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4 |
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708 |
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NJ |
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|
4 |
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657 |
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WA |
|
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4 |
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443 |
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AZ |
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|
3 |
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|
|
708 |
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NY |
|
|
3 |
|
|
|
452 |
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KS |
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|
2 |
|
|
|
699 |
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MS |
|
|
2 |
|
|
|
582 |
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AL |
|
|
2 |
|
|
|
559 |
|
CO |
|
|
2 |
|
|
|
421 |
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CT |
|
|
2 |
|
|
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327 |
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OK |
|
|
2 |
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288 |
|
DE |
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|
1 |
|
|
|
595 |
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OR |
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|
1 |
|
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275 |
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MO |
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0 |
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298 |
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WI |
|
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0 |
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296 |
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FL |
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0 |
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20 |
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233 |
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73,109 |
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All of the above branch offices, along with CBS Personnels principal executive offices in
Cincinnati, Ohio, are leased. Lease terms are typically three to five years. CBS Personnel
does not anticipate any difficulty in renewing these leases or in finding alternative sites in
the ordinary course of business. With regard to the recent Staffmark acquisition a significant
majority of the branches are not in overlapping markets.
38
Regulatory Environment
In the United States, temporary employment services firms are considered the legal employers of
their temporary workers. Therefore, state and federal laws regulating the employer/employee
relationship, such as tax withholding and reporting, social security and retirement, equal
employment opportunity and Title VII
Civil Rights laws and workers compensation, including those governing self-insured employers
under the workers compensation systems in various states, govern CBS Personnels operations.
By entering into a co-employer relationship with employees who are assigned to work at client
locations, CBS Personnel assumes certain obligations and responsibilities of an employer under
these federal and state laws. Because many of these federal and state laws were enacted prior
to the development of nontraditional employment relationships, such as professional employer,
temporary employment, and outsourcing arrangements, many of these laws do not specifically
address the obligations and responsibilities of nontraditional employers. In addition, the
definition of employer under these laws is not uniform.
Although compliance with these requirements imposes some additional financial risk on CBS
Personnel, particularly with respect to those clients who breach their payment obligation to
CBS Personnel, such compliance has not had a material adverse impact on CBS Personnels
business to date. CBS Personnel believes that its operations are in compliance in all material
respects with applicable federal and state laws.
Workers Compensation Program
As the employer of record, CBS Personnel is responsible for complying with applicable statutory
requirements for workers compensation coverage. State law (and for certain types of
employees, federal law) generally mandates that an employer reimburse its employees for the
costs of medical care and other specified benefits for injuries or illnesses, including
catastrophic injuries and fatalities, incurred in the course and scope of employment. The
benefits payable for various categories of claims are determined by state regulation and vary
with the severity and nature of the injury or illness and other specified factors. In return
for this guaranteed protection, workers compensation is considered the exclusive remedy and
employees are generally precluded from seeking other damages from their employer for workplace
injuries. Most states require employers to maintain workers compensation insurance or
otherwise demonstrate financial responsibility to meet workers compensation obligations to
employees.
In many states, employers who meet certain financial and other requirements may be permitted to
self-insure. CBS Personnel self-insures its workers compensation exposure for a portion of its
employees. Regulations governing self-insured employers in each jurisdiction typically require
the employer to maintain surety deposits of government securities, letters of credit or other
financial instruments to support workers compensation claims in the event the employer is
unable to pay for such claims.
As an employer with self-insurance and large deductible plans for workers compensation, CBS
Personnels workers compensation expense is tied directly to the incidence and severity of
workplace injuries to its employees. CBS Personnel seeks to contain its workers compensation
costs through a proactive front-end client selection process in order to mitigate the
acceptance of high risk situations together with an aggressive approach to claims management,
including assigning injured workers, whenever possible, to short-term assignments which
accommodate the workers physical limitations, performing a thorough and prompt on-site
investigation of claims filed by employees, working with physicians to encourage efficient
medical management of cases, denying questionable claims and attempting to negotiate early
settlements to mitigate contingent and future costs and liabilities. Higher costs for each
occurrence, either due to increased medical costs or duration of time, may result in higher
workers compensation costs to CBS Personnel with a corresponding material adverse effect on
its financial condition, business and results of operations.
Employees
As of December 31, 2008, CBS Personnel employed approximately 158 individuals in its corporate
staff and approximately 1132 staff members in its field operations. During the year ended
December 31, 2008, 2007 and 2006, CBS Personnel placed, on average, over 38,000, 23,000 and
22,000 temporary personnel, not including leased personnel, on engagements of varying durations
on a weekly basis. None of CBS Personnels employees are subject to collective bargaining
agreements. We believe that CBS personnels relationship with its employees is good.
Temporary employees placed by CBS Personnel are generally CBS Personnels employees while they
are working on assignments. As the employer of its temporary employees, CBS Personnel maintains
responsibility for applicable payroll taxes and the administration of the employees share of
such taxes.
39
Rebranding of CBS Personnel
On February 27, 2009 management announced that Staffmark is now the new name of the combined
CBS Personnel, Staffmark, and Venturi Staffing organizations and will be recognized by a new
corporate identity. The decision to rebrand the three companies under the Staffmark name is
the result of twelve months of strategic planning, with emphasis on gathering broad-based
feedback from customers and employees throughout all geographic locations. The new identity
will be deployed throughout CBS Personnel, Venturi Staffing, and Staffmark offices in a
transitioned rollout over the next 12-18 months. Throughout this document we will continue to
refer to CBS Personnel when discussing the combined operations of CBS personnel, Staffmark and
Venturi Staffing.
Fox
Overview
Fox, with operations headquartered in Watsonville, California, is a branded action sports
company that designs, manufactures and markets high-performance suspension products for
mountain bikes, snowmobiles, motorcycles, all-terrain vehicles (ATVs), and other off-road
vehicles.
Foxs products are recognized by manufacturers and consumers as being among the most
technically advanced suspension products currently available in the marketplace. Foxs
technical success is demonstrated by its dominance of award winning performances by
professional athletes utilizing its suspension products. As a result, Foxs suspension
components are incorporated by OEM customers on their high-performance models at the top of
their product lines. OEMs leverage the strength of Foxs brand to maintain and expand their own
sales and margins. In the Aftermarket segment, customers seeking higher performance select
Foxs suspension components to enhance their existing equipment.
Fox sells to approximately 134 OEM and 6,875 Aftermarket customers across its market segments.
In each of the years 2008 and 2007, approximately 76% and 75% of net sales were to OEM
customers with the remaining sales to Aftermarket customers. Foxs senior management,
collectively, has approximately 100 years of experience in the suspension design and
manufacturing industry and other closely related industries. Additional information is available at www.foxracingshox.com.
For the fiscal years ended December 31, 2008 and 2007, Fox had net sales of approximately
$131.7 million and $105.7 million and operating income of $10.7 million and $2.4 million,
respectively. Fox had total assets of $124.5 million at December 31, 2008. Foxs net sales
represented 8.6% of our consolidated net sales for the year ended December 31, 2008.
History of Fox
Fox was founded by Bob Fox in 1974 when, having participated in motocross racing, he sought to
create a racing suspension shock that was not prone to overheating like most of the shocks
available at that time. Working in a friends garage, Mr. Fox created the Fox Air-Shox. The
product was successful and within two years it was used to win the U.S. 500cc National
Motocross Championship.
In 1978, Fox began producing high performance suspension products for off-road and motorcycle
racing. From 1978 to 1983, Fox suspension users won the 500cc Grand Prix (motocross), Baja 1000
(off-road), AMA Super Bike (motorcycle road racing) and Indy 500 (auto racing) generating
greater market awareness for the Fox brand especially among racing enthusiasts.
As Fox grew, the company applied the same core suspension technologies developed for motocross
racing to other categories. In 1987, Fox entered the snowmobile market. By 1993, Fox began
supplying the mountain bike industry with rear shocks before offering front fork suspensions in
2001. Fox entered the ATV and other off-road markets in 2002.
We acquired a majority interest in Fox on January 4, 2008.
Industry
Fox provides suspension products for mountain biking and powered vehicles, such as,
snowmobiles, all-terrain/utility vehicles, motorcycling/motocross and off-road/specialty
vehicles.
40
Mountain Biking In 2007, the US mountain biking market generated over $6.0 billion of sales
according to the National Bicycle Dealers Association. Mountain bike related sales accounted
for approximately 28% of this total. These sales were primarily conducted through three
channels: mass merchants, chain sporting goods and Independent Bike Dealers (IBDs). These
channels are differentiated by the price, quality and selection of the mountain bikes they
offer, with the IBD segment consisting of premium priced and highly technical performance
bikes.
Mountain biking enthusiasts typically have strong preferences concerning not only the OEM brand
but also for the components used by OEM manufacturers. Shocks, forks, wheels and drive-trains
strongly influence customers buying decisions. OEMs have formed partnerships with premium
component manufacturers having strong brands in order to generate increased sales of their
fully assembled bikes. Foxs components are generally selected by OEMs participating in the IBD
segment and by Aftermarket consumers seeking increased performance characteristics.
Snowmobiles In 2007, the worldwide market for new snowmobiles was $1.3 billion. Fox
management estimates replacement parts, accessories and clothing accounted for an additional
$900 million. Snowmobiling can be segmented into the following categories:
Performance/crossover snowmobiles used for a variety of activities including racing;
Touring/utility snowmobiles that are more comfortable and often seat two people; Mountain
snowmobiles that are performance-oriented, focusing on vertical geography; Trail snowmobiles
that are primarily used for riding groomed and un-groomed trails; and Youth snowmobiles. Fox
provides suspension products in each of these categories.
As a way to stimulate demand for new snowmobiles and entice customers to purchase more premium
priced snowmobiles, OEMs will select Fox shocks. Additionally, OEMs offer the Foxs shock
absorbers as upgrades on less expensive models. Aftermarket customers will select Fox
components for increased performance characteristics.
All-Terrain Vehicles In 2007, the worldwide ATV market was $8.6 billion according to
managements estimates. The market for all-terrain vehicles (ATVs) and utility vehicles can be
divided into four segments: Recreation/Utility ATVs that are primarily used for trail riding,
hunting and farming; Sport ATVs are high performance, two-wheel drive machines used for racing
and aggressive trail riding; Youth ATVs; and Side-by-Side ATVs. Fox develops and sells shocks
into the performance and racing sport, youth and side-by-side sub-segments of the ATV market.
Similar to the snowmobile industry, OEMs will stimulate demand for new ATVs and entice
customers to purchase more premium priced ATVs by selecting Foxs shocks for their premium
models. Additionally, OEMs offer the companys shock absorbers as upgrades on less expensive
models. Aftermarket sales are comprised of customers seeking enhanced performance
characteristics.
Motorcycles/Motocross
In 2007, the worldwide motorcycle market was $32 billion according to
management estimates . The motorcycle market consists of all classes of on-road and off-road
motorcycles. There are three main categories: On-highway motorcycles that are primarily used on
paved roads; Dual motorcycles that are used for both on and off-road activities; and
Off-highway motorcycles that are only certified for off-road use. The Off-road category is
further segmented into motocross, off-road which includes youth motocross and youth off-road.
Currently, OEM needs for suspension products are largely filled by captive suppliers in this
category. As such, Fox has focused on the Aftermarket performance racing segments.
Aftermarket sales are comprised of customers seeking enhanced performance characteristics.
Off-Road Vehicles The off-road vehicle industry can be divided into five segments: off-road
trucks, buggies, sand buggies, rock crawlers and lifted trucks. Consumers in the truck, buggy,
sand buggy and rock crawler categories range from serious racers and enthusiasts to individuals
involved primarily in recreational activities. The lifted truck segment, which consists of
vehicles that in many cases never leave the highway, is divided generally by price point. Foxs
products target only the high-end price point for each of these five segments. Off-road
vehicles are generally customized vehicles with aftermarket components unlike OEM vehicles. As
a result Fox generally sells to Aftermarket consumers seeking increased performance
characteristics.
41
Products and Services
Fox designs and manufactures suspension products that dissipate the energy and force generated
by various action sport activities. A suspension product lets wheels move up and down to absorb
bumps and shocks while keeping the tires in contact with the ground for better control. Foxs
products use aerospace alloys and feature adjustable suspension, progressive spring rates, and
low weight combined with structural rigidity. Fox suspension products improve user control for
greater performance while maximizing comfort levels.
Each suspension product built at Foxs manufacturing facilities is hand fit according to
precise specifications at multiple stages throughout the assembly process to ensure
consistently high performance levels and customer satisfaction. Finished parts are assembled in
multiple assembly cells and on an assembly line using precise tooling to ensure manufacturing
consistency and product functionality. Fox has developed a number of highly sophisticated
assembly machines to ensure consistent high quality.
Competitive Strengths
Proprietary Engineering Expertise Fox maintains a broad base of technical innovation and
design that has been developed over the past 35 years. Foxs technical expertise enables the
development and production of some of the most advanced suspension products available in the
market. With its history of innovation and design, Fox has created a deep portfolio of key
intellectual property related to suspension technology and applications.
Highly Recognizable Brand Driven by a long history of innovation, Fox has created a highly
respected and well-known brand for advanced suspension products. A product branded with the FOX
Racing Shox logo represents the highest level of technical performance for enthusiasts and
professionals who require suspension systems capable of handling demanding conditions. The FOX
Racing Shox logo is prominently displayed on all of Foxs products and provides a halo effect
for complementary products.
Strong Blue-Chip Customer Relationships Given the long history of performance for Foxs
suspension products, OEM customers seeking the highest level of quality and technical features
for suspension have developed strong long-term relationships with the company.
Business Strategies
Expand Revenues from Powered Sports Business Foxs focus on developing premier suspension
technologies continues to create complementary opportunities across this segment. For example,
Fox was chosen to supply shocks to Fords Special Vehicle Division specifically for its F-150
SVT Raptor Off-Road Truck. Additionally, Fox is currently in discussions with participants in
numerous other industries including military applications.
Expand Aftermarket Sales The sale of aftermarket parts typically carries higher gross
margins than a similar OEM sale. Fox is further investing in its Aftermarket sales
infrastructure to foster sales growth in 2009 and beyond. One of the simplest and most
effective ways for customers to improve their performance is the purchase and installation of
an aftermarket Fox suspension product when compared to the expense of purchasing an entirely
new platform.
International Growth Due to the successful efforts of Foxs operations teams, distribution
to foreign OEMs and distributors is well-established. By selectively increasing infrastructure
and honing its focus on identified opportunities, Fox plans to continue its sales growth in
Europe. Further, management plans include investigation of other international market
opportunities such as Asia and South America. International sales represented 70%, 67% and 53% of
net sales in fiscal 2008, 2007 and 2006, respectively.
Pursue New Market Trends and Opportunities New trends in action sports can lead to
significant market opportunities. Foxs close association with racing and its professionals
allows it to see new trends as they emerge. Depending on the trend, Fox will develop new
products that address these needs.
42
Research and Development
Foxs products are among the most technically advanced and rigorously engineered in their
markets. They are specifically designed to function and perform under diverse and extreme
conditions. Foxs research and development effort is at the core of its strategy of product
innovation and market leadership. Foxs products feature a combination of innovative design,
high-quality materials, functionality and performance elements and are recognized as being the
leaders or among the leaders in all of the market segments in which they participate.
Fox has a ten person core R&D team, which has collectively over 147 years of combined industry
experience. In addition to the core engineering group, a large number of other Fox staff
members, who also use the companys products, contribute to the research and development effort
at various stages. This may take the form of initial brainstorming sessions or ride testing
products in development. Product development also includes collaborating with customers, field
testing by sponsored race teams and working with grass roots riders. This feedback helps ensure
products will meet the companys demanding standards of excellence as well as the constantly
changing needs of professional and recreational end users.
Foxs R&D activities are supported by state-of-the-art engineering software design tools,
integrated manufacturing facilities and a performance testing center equipped to ensure product
safety, durability and superior performance. The testing center collects data and tests
products prior to and after commercial introduction. Suspension products undergo a variety of
rigorous performance and accelerated life tests. Research and development costs totaled $2.6
million, $2.0 million and $1.7 million in each of the years 2008, 2007 and 2006.
Customers
Foxs reputation for product quality, durability and technical excellence has resulted in a
customer base that includes some of the worlds leading OEMs and a loyal following of
knowledgeable and experienced end users. Foxs OEM customers are market leaders in their
respective categories, and help define, as well as respond to, consumer trends in their
respective industries. These customers provide exceptional market support for Fox by including
the companys products on their highest-performing models. OEMs will often use Foxs components
to improve the marketability and demand of their own products.
Fox sells to over 185 OEM customers and 6,875 Aftermarket customers. One customer accounted
for approximately 10.7% and 12.8% of net sales for the years ended December 31, 2008 and 2007,
respectively. Foxs top 20 customers accounted for approximately 60.9% and 61.2% of net sales
in 2008 and 2007 (sales data by customer was not readily available for 2006). International sales totaled $92.5 million, $70.5 million and $46.7 million in each of the
years 2008, 2007 and 2006, respectively. Sales to Taiwan totaled $44.8 million and $37.3 million in
2008 and 2007, respectively. Sales attributable to countries outside the United States are
based on shipment location. The international sales amounts provided do not necessarily
reflect the end customer location as many of our products are assembled at international
locations with the ultimate customer located in the United States.
Sales and Marketing
Fox employs 12 dedicated sales professionals. Each divisional sales person is fully dedicated
to servicing either OEM or Aftermarket customers ensuring that Foxs customers receive only the
most capable person to address their unique needs. Fox strongly believes that providing the
best service to its end customers is essential in maintaining its reputational excellence in
the marketplace. The sales force receives training on the latest Fox products and technologies
in addition to attending trade shows to increase its market knowledge.
The primary goal of the marketing program is to promote the technical superiority of Foxs
innovative products. Fox increases brand awareness and equity with end users through several
marketing channels including: Advertisements in publications and websites; Team and individual
sponsorships; Support and promotion at outdoor events; Trade shows; Website development; and
Dealer support.
Approximately 2% of net sales was spent on advertising and marketing costs in 2008, 2007 and 2006,
respectively.
43
Foxs business is somewhat seasonal. Historically, net sales are highest during the fiscal
quarters ended June and September. We believe this seasonality is due to consumer demand for
new products containing our shocks increasing due to the summer outdoor recreation season.
Fox had approximately $14.9 million and $18.5 million in firm backlog orders at December 31,
2008 and 2007, respectively.
Competition
Competition in the high-end performance segment of the suspension market revolves around
technical features, performance and durability, customer service, price and reliable order
execution. While price is a factor in all purchasing decisions, customers consider Foxs
products to be an outstanding value proposition given their significant performance and other
attributes.
Fox competes with several large suspension providers as well as numerous small manufacturers
who provide branded and unbranded products. These competitors can be segmented into the
following categories:
Mountain Biking Fox competes with several companies that manufacture front and rear mountain
bike suspension products. Management believes these include RockShox (a subsidiary of SRAM
Corporation), Tenneco Marzocchi S.r.l. (a subsidiary of Tenneco Inc.), Manitou (a subsidiary of
HB Performance Systems), SR Suntour and DT Swiss (a subsidiary of Vereinigte Drahtwerke AG).
Snowmobiles Within the snowmobile market, Management believes its two main competitors
include KYB (Kayaba Industry Co., Ltd.) and Arvin (ArvinMeritor, Inc.). Other suppliers include
Öhlins Racing AB, Walker Evans Racing, Works Performance Products and Penske Racing Shocks /
Custom Axis, Inc.
All-Terrain Vehicles A large percentage of the shocks supplied to OEM ATV manufacturers are
the result of either long-term supplier relationships or captive business units associated with
a specific OEM. Alternatively, ATV manufacturers source suspensions from a variety of
suspension manufacturers depending on the final application and performance requirements.
Management believes its two primary competitors outside of captive OEM suppliers are ZF Sachs
(ZF Friedrichshafen AG) and Arvin. Aftermarket shocks are available from large OEMs plus a
number of primarily aftermarket suppliers including Elka Suspension Inc., Öhlins Racing AB,
Works Performance Products and Penske Racing Shocks / Custom Axis, Inc.
Off-Road Vehicles Within the off-road vehicle category, Fox competes with both branded and
unbranded competitors. The two largest competitors to Fox in managements opinion are
ThyssenKrupp Bilstein Suspension GmbH (Bilstein) and King Shock Technology, Inc. (King
Shock). Other competitors include Sway-A-Way, Pro Comp Suspension, Edelbrock Corporation and
Walker Evans Racing.
Suppliers
Fox works closely with its supply base, and depends upon certain suppliers to provide raw
inputs, such as forgings and castings and molded polymers that have been optimized for weight,
structural integrity, wear and cost. Fox typically has no firm contractual sourcing agreements
with these suppliers other than purchase orders.
Additionally, Fox internally manufactures over 600 different components. Depending on component
requirements, raw inputs go through a combination of machining processes including computer
numeric control machines, drill stations and lathes. Fox utilizes manufacturing models and
workflow analysis tools to minimize bottlenecks and maximize capital asset utilization. After
initial machining, components are then outsourced to specialized manufacturers for plating,
grinding, anodizing and reaming.
44
Fox s primary raw materials used in production are aluminum and magnesium. Fox uses multiple
suppliers for these raw materials and believes that these raw materials are in adequate supply
and are available from many suppliers at competitive prices. Although we expect these costs to
decrease during fiscal 2009 due to an expected decline in related commodity prices, these
decreases may not occur as it is possible that our suppliers
may reduce overall supply in an effort to maintain higher prices. These actions would delay or
eliminate cost reductions.
Intellectual Property
Fox relies upon a combination of patents, trademarks, trade names, licensing arrangements,
trade secrets, know-how and proprietary technology in order to secure and protect its
intellectual property rights.
Foxs in-house intellectual property department and in-house counsel diligently protect its new
technologies with patents and trademarks and vigorously defend against patent infringement
lawsuits. Fox currently owns 16 patents on proprietary technologies for shock absorbers and
front fork suspension products and has an additional 40 patent pending applications in at the
U.S. Patent Office. Foxs patent portfolio, we believe, acts as an impediment to competitors to
introduce products with comparable features.
Regulatory Environment
Foxs manufacturing and assembly operations, its facilities and operations are subject to
evolving federal, state and local environmental and occupational health and safety laws and
regulations. These include laws and regulations governing air emissions, wastewater discharge
and the storage and handling of chemicals and hazardous substances. Management believes that
Fox is in compliance, in all material respects, with applicable environmental and occupational
health and safety laws and regulations. New requirements, more stringent application of
existing requirements, or discovery of previously unknown environmental conditions may result
in material environmental expenditures in the future.
Additionally, Fox is subject to the jurisdiction of the United States Consumer Product Safety
Commission (CPSC) and other federal, state and foreign regulatory bodies. Under CPSC
regulations, a manufacturer of consumer goods is obligated to notify the CPSC, if, among other
things, the manufacturer becomes aware that one of its products has a defect that could create
a substantial risk of injury. If the manufacturer has not already undertaken to do so, the CPSC
may require a manufacturer to recall a product, which may involve product repair, replacement
or refund. Fox has never had any of its products recalled.
Employees
As of December 31, 2008, Fox employed approximately 417 persons. Of these employees
approximately 53 were in sales, marketing and customer service, 26 were in engineering and 307
were in operations and IT with the remainder serving in executive and administrative
capacities. None of Foxs employees are subject to collective bargaining agreements. We believe
that Foxs relationship with its employees is good.
HALO
Overview
With operations headquartered in Sterling, IL, HALO is an independent provider of customized
drop-ship promotional products in the U.S. and operates under the well-known brand names of
HALO and Lee Wayne. Through an extensive group of dedicated sales professionals, HALO serves
as a one-stop shop for over 40,000 customers throughout the U.S. HALO is involved in the
design, sourcing, management and fulfillment of promotional products across several product
categories, including apparel, calendars, writing instruments, drinkware and office
accessories. HALOs sales professionals work with customers and vendors to develop the most
effective means of communicating a logo or marketing message to a target audience. A large
majority of products sold are drop shipped, reducing the companys inventory risk.
We believe HALO is the largest promotional products business in the customized, drop ship
sub-sector of the highly fragmented $19.4 billion domestic promotional products market. HALOs
size and scale enables specialization and efficiency in back office functions that cannot be
replicated by smaller, independent operators. This scale generates purchasing power with
vendors and allows HALO to consolidate purchases across its client base to achieve improved
product pricing. Additional information is available at www.Halo.com.
45
For the fiscal years ended December 31, 2008, 2007 and 2006, HALO had net sales of
approximately $159.8 million, $144.3 million and $115.6 million, and operating income of $5.3
million $5.7 million and $5.4 million in fiscal 2008, 2007 and 2006. HALO had total assets of
$115.6 million at December 31, 2008. Net
sales from HALO represented 10.4% and 15.3% of our total consolidated net sales for fiscal 2008
and 2007, respectively.
History of HALO
HALO was founded in 1952 under its predecessor Lee Wayne Corporation. Lee Wayne
Corporation was acquired in the early 1990s by HA-LO Industries, Inc., a provider of
advertising and marketing services. In 2004, the entity formed to acquire the domestic
promotional product assets of HA-LO Industries, Inc. and was renamed HALO Branded Solutions,
Inc.
HALO acquired Goldman Promotions, a promotional products distributor in April 2008, and the
promotional products distributor division of Eskco, Inc in November 2008.
We acquired a majority interest in HALO on February 28, 2007.
Industry
Promotional products provide companies with targeted marketing and long term exposure. Given
the effectiveness of this type of brand endorsement, approximately 95% of companies use some
form of promotional product as a component of their overall marketing strategy, according to
the Promotional Products Association International (PPAI). In contrast to general
advertising, promotional products enable targeted marketing to individuals and yield long term
exposure from repeated use. According to PPAI the promotional products industry grew at a
CAGR of 4.5% between 2002 and 2007. Growth has been driven by the efficacy of promotional
products in creating and enhancing brand awareness.
The promotional products industry generally involves coordination between suppliers,
distributors and account executives. Suppliers manufacture promotional goods either internally
or through outsourced manufacturers and produce catalogs for account executives to use when
selling products. Following receipt of a product order, representatives work with their
respective distributors to administer and process the transaction, typically following up to
ensure delivery.
HALO competes in a sub-sector of the promotional products market that consists of merchandise
which is customized or decorated with logos, team names or special events. While nearly any
consumer product can serve as a marketing tool when branded, a majority of promotional products
sold are in the apparel, writing instruments, calendars, drink ware, business accessories or
bag categories. Management believes the promotional products distribution industry is
fragmented, with over 18,000 distributors in the United States, the considerable majority of
which are small firms with one to five account executives, generating sales of under $2.5
million.
The market can be broadly segregated into two large service categories: drop ship and program
or fulfillment. A drop ship order is typically one time in nature and may be related to an
event or single marketing campaign. Drop ship distributors do not take inventory of the
product; instead, sales representatives assist customers in designing a solution to achieve its
marketing objective, such as brand or company awareness, customer acquisition or customer
retention. Drop ship distributors then source the product from one of thousands of suppliers
to the industry, arrange the necessary embroidering, decorating, or other customization, and
coordinate delivery to the client. Alternatively, providers of fulfillment services develop
larger programs that involve corporate branding or incentive programs. Fulfillment
distributors design programs with the customer, take inventory of product and ship over time to
customer locations as requested.
Products and Services
HALO is one of the leading providers of promotional products that stimulate brand awareness,
customer acquisition, and customer retention. HALO offers drop ship and fulfillment services,
although drop ship services comprise a large majority of revenue. Through a sales force that
has both broad geographic coverage and deep industry expertise, HALO provides promotional
products to thousands of companies in the U.S. and Canada.
46
Examples of Common Promotional Products
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Categories |
|
Examples |
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|
Apparel
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Jackets, sweaters, hats, golf shirts |
Business Accessories
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Calculators, briefcases, desk accessories |
Calendars
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Wall and desk calendars, appointment planners |
Writing Instruments
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Pens, pencils, markers, highlighters |
Recognition Awards
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Trophies, plaques |
Other Items
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Crystal ware, key chains, watches, mugs, golf accessories |
HALO and its sales professionals assist customers in identifying and designing promotional
products that increase the awareness and appeal of brands, products, companies and
organizations. HALO sales people regularly play a consultative role with customers in the
development of promotional materials, resulting in an array of product sourcing. HALO also
provides fulfillment services on a selective basis.
As a result of its focus on automation, management has implemented what it believes to be an
industry leading and proprietary information system to supplement HALOs customer service
operation. The system is tailored to support the unique needs of its customers and provides the
flexibility required to integrate an acquisition or respond to a customer demand. The
information system supports all aspects of the business, including order processing, billing,
accounting, fulfillment and inventory management.
Competitive Strengths
HALO has established itself as a leading distributor in the promotional products industry.
HALOs management believes the following factors differentiate it from many industry
competitors.
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Industry Leading, Scalable Back Office Infrastructure HALOs
management team believes that an important factor in attracting and
retaining high quality account executives is providing an efficient
and effective order processing and administrative system. HALOs
customer service organization provides critical support functions for
its sales force including order entry, product sourcing, order
tracking, vendor payment, customer billing and collections. HALOs
scale in the industry has allowed it to make information technology
and personnel investments to create a sophisticated infrastructure
that management believes differentiates it from many smaller industry
participants. |
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Diverse Customer Base Characterized by Long-Standing Relationships
HALOs revenue base possesses little customer, end market or
geographic concentration. It currently does business with over 40,000
customers in various end markets. For the fiscal year ended December
31, 2008, 2007 and 2006, HALOs top ten customers represented less
than 20% of its revenues. HALOs team of account executives are often
deeply involved in their local communities and possess deep and long
standing relationships with customers of all sizes. |
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Extensive Relationships with a Broad Base of Suppliers HALOs
management believes its relationships with a wide range of suppliers
of promotional products allows HALO to offer its end customers the
most complete line of items in the industry. |
Business Strategies
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|
Attract and Retain Account
Executives As HALOs
infrastructure is relatively
fixed in nature, it can
derive significant
incremental contribution
from the addition of account
executives. Further, HALOs
management believes it has
developed a combination of
service and compensation
that allows it to offer
account executives a value
proposition superior to
those offered by its
competitors. |
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Optimize the Productivity of
Account Executives The
management team of HALO
continuously strives to
increase the productivity of
its account executives. HALO
routinely provides its
account executives with
marketing support tools and
training. In addition, for
larger accounts, HALO works
with account executives to
develop proprietary
solutions that allow
customers to better measure
and track their programs,
thereby increasing their
loyalty. |
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Restructure costs In light of current
severe economic pressures, HALO has reduced
its expenses to more appropriately
align its cost structure with anticipated
reductions in revenue due to the current
economic downturn. These expense reductions
address most aspects of HALOs business.
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47
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Selectively Acquire and
Integrate HALOs
management believes that
HALO is well positioned to
take advantage of the
industrys fragmentation and
economies of scale. In the
past, HALO has achieved
significant synergies by
acquiring and integrating
other distributors.
Recognizing this
opportunity, HALOs
management team is
constantly evaluating
potential acquisition
opportunities. We believe
that current economic
conditions may enhance our
opportunities to make
desirable acquisitions. |
Customers
HALO has developed relationships with a diverse base of over 40,000 customers. HALOs customers
include a number of Fortune 500 companies as well as privately held businesses that rely on HALO
as their sole marketing services provider. Sales to HALOs top ten customers comprised fewer
than 20% of total sales in 2008 and 2007.
Sales and Marketing
HALOs revenue is generated through its sales force, which consults directly with clients to
develop a solution that best meets their needs for each order and/or utilizes HALOs
infrastructure to build customized websites that act as online company stores. HALOs back
office receives orders from internal sales representative via phone, fax or email. HALOs
tracking systems allow sales representatives to ensure that products are drop shipped directly
from the vendor to the customer on time. HALOs salespeople are based throughout the U.S. in
order to better serve a geographically diverse customer base.
HALO historically recognizes approximately 70% of its net sales in the fiscal quarters ended
September and December due to calendar sales and corporate demand during the holiday season.
The following represents product category sales as a percent of gross sales by product in fiscal
2008:
(Percent of sales by product category is not available for prior years)
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|
Percent of |
Product category |
|
sales |
Apparel |
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19.9 |
% |
Office accessories |
|
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15.1 |
% |
Bags |
|
|
14.1 |
% |
Writing instruments |
|
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13.8 |
% |
Calendars |
|
|
11.6 |
% |
Jewelry/awards |
|
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5.0 |
% |
Drinkware |
|
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4.0 |
% |
Other |
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16.5 |
% |
|
|
|
|
|
|
|
|
100.0 |
% |
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|
|
Substantially all revenue is derived from sales within the United States.
HALO had approximately $15.0 million and $12.5 million in firm backlog orders at December 31, 2008
and 2007, respectively.
Competition
We believe HALO is the largest drop ship promotional products distributor in the U.S.
Management believes the promotional products distribution industry is fragmented, with over
18,000 distributors in the United States, the considerable majority of which are small firms
with one to five account executives, generating sales of under $2.5 million. Industry players
can be segmented into the following categories, or a combination thereof:
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Full Service Companies that provide a wide array of services to a range of
customers, including multinational clients. Full service offerings include both the
drop shipment and fulfillment business models. HALO is a full service distributor. |
48
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Inventory Based Distributors that provide inventory programs for large
corporations. Inventory based providers are generally capital intensive, often
requiring a large investment to maintain a broad inventory of SKUs. |
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Franchisers Distributors that process and finance orders for a franchise fee.
Franchisers do not offer back office support and typically attract distributors with
lower credit profiles and those with available time to perform customer service
functions. |
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|
Consumer Products Manufacturers Some customer product manufacturers provide
promotional products. Consumer product manufacturers, for whom promotional products is
a non-core business, do not customarily invest in the necessary infrastructure to meet
the support needs of industry sales professionals. |
Competition in the promotional product industry revolves around product assortment, price,
customer service and reliable order execution. In addition, given the intimate relationships
account executives enjoy with their customers, industry participants also compete to retain and
recruit top earners who posses a meaningful existing book of business.
Suppliers
HALO purchases products and services from over 3,500 companies. One supplier accounted for
approximately 10% of purchases in the year ended December 31, 2008. If circumstances required
us to replace this supplier we believe we could do so with minimal interruption in our product
flow and at a negligible cost.
Employees
As of December 31, 2008, HALO employed approximately 477 full-time employees and approximately
760 independent sales representatives. Of the full-time employees, approximately 297 were in
sales and customer service, 31 were in fulfillment, with the remainder serving in executive and
administrative office capacities. None of HALOs employees are subject to collective bargaining
agreements. We believe that HALOs relationship with its employees is good.
49
ITEM 1A RISK FACTORS
Risks Related to Our Business and Structure
We are a company with limited history and may not be able to continue to successfully manage our
businesses on a combined basis.
We were formed on November 18, 2005 and have conducted operations since May 16, 2006. Although
our management team has, collectively, over 75 years of experience in acquiring and managing
small and middle market businesses, our failure to continue to develop and maintain effective
systems and procedures, including accounting and financial reporting systems, to manage our
operations as a consolidated public company, may negatively impact our ability to optimize the
performance of our Company, which could adversely affect our ability to pay distributions to our
shareholders. In addition, in that case, our consolidated financial statements might not be
indicative of our financial condition, business and results of operations.
Our 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 years ended December 31, 2008 and December 31, 2007, and the period from May 16, 2006
through December 31, 2006. Consequently, meaningful year-to-year comparisons of full year 2007
and full year 2006 are not and will not be available.
Our future success is dependent on the employees of our Manager and the management teams of our
businesses, the loss of any of whom could materially adversely affect our financial condition,
business and results of operations.
Our future success depends, to a significant extent, on the continued services of the employees
of our Manager, most of whom have worked together for a number of years. While our Manager will
have employment agreements with certain of its employees, including our Chief Financial Officer,
these employment agreements may not prevent our Managers employees from leaving or from
competing with us in the future. Our Manager does not have an employment agreement with our
Chief Executive Officer.
The future success of our businesses also depends on their respective management teams because
we operate our businesses on a stand-alone basis, primarily relying on existing management teams
for management of their day-to-day operations. Consequently, their operational success, as well
as the success of our internal growth strategy, will be dependent on the continued efforts of
the management teams of the businesses. We provide such persons with equity incentives in their
respective businesses and have employment agreements and/or non-competition agreements with
certain persons we have identified as key to their businesses. However, these measures may not
prevent the departure of these managers. The loss of services of one or more members of our
management team or the management team at one of our businesses could materially adversely
affect our financial condition, business and results of operations.
We are exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act of 2002.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. While we have
concluded that at December 31, 2008 we have no material weaknesses in our internal controls over
financial reporting we cannot assure you that we will not have a material weakness in the
future. A material weakness is a control deficiency, or combination of significant
deficiencies that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. If we fail to maintain
a system of internal controls over financial reporting that meets the requirements of Section
404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC
or by the NASDAQ Stock Market LLC. Additionally, failure to comply with Section 404 or the
report by us of a material weakness may cause investors to lose confidence in our financial
statements and our stock price may be adversely affected. If we fail to remedy any material
weakness, our financial statements may be inaccurate, we may not have access to the capital
markets, and our stock price may be adversely affected.
50
We face risks with respect to the evaluation and management of future platform or add-on
acquisitions.
A component of our strategy is to continue to acquire additional platform subsidiaries, as well
as add-on businesses for our existing businesses. Generally, because such acquisition targets
are held privately, we may experience difficulty in evaluating potential target businesses as
the information concerning these businesses is not publicly available. In addition, we and our
subsidiary companies may have difficulty effectively managing or integrating acquisitions. We
may experience greater than expected costs or difficulties relating to such acquisition, in
which case, we might not achieve the anticipated returns from any particular acquisition, which
may have a material adverse effect on our financial condition, business and results of
operations.
We may not be able to successfully fund future acquisitions of new businesses due to the lack of
availability of debt or equity financing at the Company level on acceptable terms, which could
impede the implementation of our acquisition strategy and materially adversely impact our
financial condition, business and results of operations.
In order to make future acquisitions, we intend to raise capital primarily through debt
financing at the Company level, additional equity offerings, the sale of stock or assets of our
businesses, and by offering equity in the Trust or our businesses to the sellers of target
businesses or by undertaking a combination of any of the above. Since the timing and size of
acquisitions cannot be readily predicted, we may need to be able to obtain funding on short
notice to benefit fully from attractive acquisition opportunities. Such funding may not be
available on acceptable terms. In addition, the level of our indebtedness may impact our ability
to borrow at the Company level. Another source of capital for us may be the sale of additional
shares, subject to market conditions and investor demand for the shares at prices that we
consider to be in the interests of our shareholders. These risks may materially adversely affect
our ability to pursue our acquisition strategy successfully and materially adversely affect our
financial condition, business and results of operations.
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 and put price will be payment
obligations of the Company and, as a result, will be paid, along with other Company obligations,
prior to the payment of distributions to our shareholders. The 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.
We will rely entirely on receipts from our businesses to make distributions to our shareholders.
The Trusts sole asset is its interest in the Company, which holds controlling interests in our
businesses. Therefore, we are dependent upon the ability of our businesses to generate earnings
and cash flow and distribute them to us in the form of interest and principal payments on
indebtedness and, from time to time, dividends on equity to enable us, first, to satisfy our
financial obligations and, second, to make distributions to our shareholders. This ability may
be subject to limitations under laws of the jurisdictions in which they are incorporated or
organized. If, as a consequence of these various restrictions, we are unable to generate
sufficient receipts from our businesses, we may not be able to declare, or may have to delay or
cancel payment of, distributions to our shareholders.
We do not own 100% of our businesses. While the Company is to receive cash payments from our
businesses which are in the form of interest payments, debt repayment and dividends, if any were
to be paid by our businesses, they would be shared pro rata with the minority shareholders of
our businesses and the amounts of dividends made to minority shareholders would not be available
to us for any purpose, including Company debt service or distributions to our shareholders. Any
proceeds from the sale of a business will be allocated among us and the minority shareholders of
the business that is sold.
51
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, you may disagree with changes made to the terms of our shares, and
you may disagree with the Companys board of directors decision that the changes made to the
terms of the shares are not materially adverse to you as a shareholder or that they do not alter
the characterization of the Trust. Your recourse, if you disagree, will be limited because our
Trust Agreement gives broad authority and discretion to our board of directors. However, the
Trust Agreement does not relieve the 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 to be issued to raise additional equity and remain a fixed-investment trust for tax
purposes.
Certain provisions of the LLC Agreement of the Company and the Trust Agreement make it difficult
for third parties to acquire control of the Trust and the Company and could deprive you of the
opportunity to obtain a takeover premium for your shares.
The LLC Agreement and 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:
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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; |
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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; |
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requiring that directors elected by our shareholders be removed, with or without cause,
only by a vote of 85% of our shareholders; |
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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; |
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having a substantial number of additional authorized but unissued shares that may be
issued without shareholder action; |
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providing the Companys board of directors with certain authority to amend the LLC
Agreement and the Trust Agreement, subject to certain voting and consent rights of the
holders of trust interests and Allocation Interests; |
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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 |
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limitations regarding calling special meetings and written consents of our shareholders. |
These provisions, as well as other provisions in the LLC Agreement and Trust Agreement may
delay, defer or prevent a transaction or a change in control that might otherwise result in you
obtaining a takeover premium for your shares.
52
We may have conflicts of interest with the minority shareholders of our businesses.
The boards of directors of our respective businesses have fiduciary duties to all their
shareholders, including the Company and minority shareholders. As a result, they may make
decisions that are in the best interests of their
shareholders generally but which are not necessarily in the best interest of the Company or our
shareholders. In dealings with the Company, the directors of our businesses may have conflicts
of interest and decisions may have to be made without the participation of directors appointed
by the Company, and such decisions may be different from those that we would make.
Our third party credit facility exposes us to additional risks associated with leverage and
inhibits our operating flexibility and reduces cash flow available for distributions to our
shareholders.
At December 31, 2008, we had approximately $153.0 million of Term Debt outstanding and no
outstanding borrowings on our Revolving Credit Facility. We expect to increase our level of
debt in the future. The terms of our Revolving Credit Facility contains a number of affirmative
and restrictive covenants that, among other things, require us to:
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maintain a minimum level of cash flow; |
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leverage new businesses we
acquire to a minimum specified level at the time of acquisition; |
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keep our total debt to cash flow at or below a ratio of 3.5 to 1; and |
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make acquisitions that satisfy certain specified minimum criteria. |
If we violate any of these covenants, our lender may accelerate the maturity of any debt
outstanding and we may be prohibited from making any distributions to our shareholders. Such
debt is secured by all of our assets, including the stock we own in our businesses and the
rights we have under the loan agreements with our businesses. Our ability to meet our debt
service obligations may be affected by events beyond our control and will depend primarily upon
cash produced by our businesses. Any failure to comply with the terms of our indebtedness could
materially adversely affect us.
Changes in interest rates could materially adversely affect us.
Our Credit Agreement bears interest at floating rates which will generally change as interest
rates change. We bear the risk that the rates we are charged by our lender will increase faster
than the earnings and cash flow of our businesses, which could reduce profitability, adversely
affect our ability to service our debt, cause us to breach covenants contained in our Revolving
Credit Facility and reduce cash flow available for distribution, any of which could materially
adversely affect us.
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, owns 7,681,000 or 24.4% of our shares and may have
significant influence over the election of directors in the future.
53
If, in the future, we cease to control and operate our businesses, we may be deemed to be an
investment company under the Investment Company Act of 1940, as amended.
Under the terms of the LLC Agreement, we have the latitude to make investments in businesses
that we will not operate or control. If we make significant investments in businesses that we do
not operate or control or cease to operate and control our businesses, we may be deemed to be an
investment company under the Investment Company Act of 1940, as amended, or the Investment
Company Act. If we were deemed to be an investment company, we would either have to register as
an investment company under the Investment Company Act, obtain exemptive relief from the SEC or
modify our investments or organizational structure or our contract rights to fall outside the
definition of an investment company. Registering as an investment
company could, among other things, materially adversely affect our financial condition, business
and results of operations, materially limit our ability to borrow funds or engage in other
transactions involving leverage and require us to add directors who are independent of us or our
Manager and otherwise will subject us to additional regulation that will be costly and
time-consuming.
Risks Relating to Our Manager
Our Chief Executive Officer, directors, Manager and management team may allocate some of their
time to other businesses, thereby causing conflicts of interest in their determination as to how
much time to devote to our affairs, which may materially adversely affect our operations.
While the members of our management team anticipate devoting a substantial amount of their time
to the affairs of the Company, only Mr. James Bottiglieri, our Chief Financial Officer, devotes
100% of his time to our affairs. Our Chief Executive Officer, directors, Manager and members of
our management team may engage in other business activities. This may result in a conflict of
interest in allocating their time between our operations and our management and operations of
other businesses. Their other business endeavors may be related to CGI, which will continue to
own several businesses that were managed by our management team prior to our initial public
offering, or affiliates of CGI as well as other parties. Conflicts of interest that arise over
the allocation of time may not always be resolved in our favor and may materially adversely
affect our operations. See the section entitled Certain Relationships and Related Party
Transactions for the potential conflicts of interest of which you should be aware.
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 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 the 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 the market price of our shares.
Under the terms of the Management Services Agreement, our Manager cannot be removed as a result
of underperformance. Instead, the 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. This
limitation could materially adversely affect the market price of our shares.
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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 with a
significant ownership interest therein, we may have difficulty completely severing ties with Mr.
Massoud absent terminating the Management Services Agreement and our relationship with our
Manager.
If the Management Services Agreement is terminated, our Manager, as holder of the Allocation
Interests in the Company, has the right to cause the Company to purchase such Allocation
Interests, which may materially adversely affect our liquidity and ability to grow.
If the Management Services Agreement is terminated at any time other than as a result of our
Managers resignation or if our Manager resigns on any date that is at least three years after
the closing of our initial public offering, our Manager will have the right, but not the
obligation, for one year from the date of termination or resignation, as the case may be, to
cause the Company to purchase the Allocation Interests for the put price. If our Manager elects
to cause the Company to purchase its Allocation Interests, we are obligated to do so and, until
we have done so, our ability to conduct our business, including incurring debt, would be
restricted and, accordingly, our liquidity and ability to grow may be adversely affected.
Our Manager can resign on 90 days notice and we may not be able to find a suitable replacement
within that time, resulting in a disruption in our operations that could materially adversely
affect our financial condition, business and results of operations as well as the market price
of our shares.
Our Manager has the right, under the Management Services Agreement, to resign at any time on 90
days written notice, whether we have found a replacement or not. If our Manager resigns, we
may not be able to contract with a new manager or hire internal management with similar
expertise and ability to provide the same or equivalent services on acceptable terms within 90
days, or at all, in which case our operations are likely to experience a disruption, our
financial condition, business and results of operations as well as our ability to pay
distributions are likely to be adversely affected and the market price of our shares may
decline. In addition, the coordination of our internal management, acquisition activities and
supervision of our businesses is likely to suffer if we are unable to identify and reach an
agreement with a single institution or group of executives having the expertise possessed by our
Manager and its affiliates. Even if we are able to retain comparable management, whether
internal or external, the integration of such management and their lack of familiarity with our
businesses may result in additional costs and time delays that could materially adversely affect
our financial condition, business and results of operations.
The liability associated with the supplemental put agreement is difficult to estimate and may be
subject to substantial period-to-period changes, thereby significantly impacting our future
results of operations.
The Company will record the supplemental put agreement at its fair value at each balance sheet
date by recording any change in fair value through its income statement. The fair value of the
supplemental put agreement is largely related to the value of the profit allocation that our
Manager, as holder of Allocation Interests, will receive. The valuation of the supplemental put
agreement requires the use of complex financial models, which require sensitive assumptions and
estimates. If our assumptions and estimates result in an over-estimation or under-estimation of
the fair value of the supplemental put agreement, the resulting fluctuation in related
liabilities could cause a material adverse effect on our future results of operations.
We must pay our Manager the management fee regardless of our performance.
Our Manager is entitled to receive a management fee that is based on our adjusted net assets, as
defined in the Management Services Agreement, regardless of the performance of our businesses.
The calculation of the management fee is unrelated to the 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.
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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, 2008, was $14.7 million. The management fee
is calculated by reference to the Companys adjusted net assets, which will be impacted by the
acquisition or disposition of businesses, which can be significantly influenced by our Manager,
as well as the performance of our businesses and other businesses we may acquire in the future.
Changes in adjusted net assets and in the resulting management fee could be significant,
resulting in a material adverse effect on the Companys results of operations. In addition, if
the performance of the Company declines, assuming adjusted net assets remains the same,
management fees will increase as a percentage of the Companys net income.
We cannot determine the amount of profit allocation that will be paid over time with any
certainty.
We cannot determine the amount of profit allocation that will be paid over time with any
certainty. Such determination would be dependent on the potential sale proceeds received for any
of our businesses and the performance of the Company and its businesses over a multi-year period
of time, among other factors that cannot be predicted with certainty at this time. Such factors
may have a significant impact on the amount of any profit allocation to be paid. Likewise, such
determination would be dependent on whether certain hurdles were surpassed giving rise to a
payment of profit allocation. Any amounts paid in respect of the profit allocation are unrelated
to the management fee earned for performance of services under the Management Services
Agreement.
The fees to be paid to our Manager pursuant to the Management Services Agreement, the offsetting
Management Services Agreements and transaction services agreements and the profit allocation to
be paid to our Manager, as holder of the Allocation Interests, pursuant to the LLC Agreement may
significantly reduce the amount of cash available for distribution to our shareholders.
Under the Management Services Agreement, the Company will be obligated to pay a management fee
to and, subject to certain conditions, reimburse the costs and out-of-pocket expenses of our
Manager incurred on behalf of the Company in connection with the provision of services to the
Company. Similarly, our businesses will be obligated to pay fees to and reimburse the costs and
expenses of our Manager pursuant to any offsetting management services agreements entered into
between our Manager and one of our businesses, or any transaction services agreements to which
such businesses are a party. In addition, our Manager, as holder of the Allocation Interests,
will be entitled to receive profit allocations and may be entitled to receive the put price.
While it is difficult to quantify with any certainty the actual amount of any such payments in
the future, we do expect that such amounts could be substantial. See the section entitled
Certain Relationships and Related Party Transactions for more information about these payment
obligations of the Company. The management fee, profit allocation and put price will be payment
obligations of the Company and, as a result, will be paid, along with other Company obligations,
prior to the payment of distributions to shareholders. As a result, the payment of these amounts
may significantly reduce the amount of cash flow available for distribution to our shareholders.
Our Managers influence on conducting our operations, including on our conducting of
transactions, gives it the ability to increase its fees and compensation to our Chief Executive
Officer, which may reduce the amount of cash flow available for distribution to our
shareholders.
Under the terms of the Management Services Agreement, our Manager is paid a management fee
calculated as a percentage of the Companys net assets, adjusted for certain items, and is
unrelated to net income or any other performance base or measure. Our Manager, which Mr.
Massoud, our Chief Executive Officer, controls, may advise us to consummate transactions, incur
third party debt or conduct our operations in a manner that, in our 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.
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Fees paid by the Company and our businesses pursuant to transaction services agreements do not
offset fees payable under the Management Services Agreement and will be in addition to the
management fee payable by the Company under the Management Services Agreement.
The Management Services Agreement provides that our businesses may enter into transaction
services agreements with our Manager pursuant to which our businesses will pay fees to our
Manager. See the section entitled Certain Relationships and Related Party Transactions for
more information about these agreements. Unlike fees paid under the offsetting management
services agreements, fees that are paid pursuant to such transaction services agreements will
not reduce the management fee payable by the Company. Therefore, such fees will be in excess of
the management fee payable by the Company.
The fees to be paid to our Manager pursuant to these transaction service agreements will be paid
prior to any principal, interest or dividend payments to be paid to the Company by our
businesses, which will reduce the amount of cash flow available for distributions to
shareholders.
Our 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. In this
respect, a calculation and payment of profit allocation may be triggered upon the sale of one of
our businesses. As a result, our Manager may be incentivized to recommend the sale of one or
more of our businesses to the Companys board of directors at a time that may not optimal for
our shareholders.
The obligations to pay the management fee and profit allocation, including the put price, may
cause the Company to liquidate assets or incur debt.
If we do not have sufficient liquid assets to pay the management fee and profit allocation,
including the put price, when such payments are due, we may be required to liquidate assets or
incur debt in order to make such payments. This circumstance could materially adversely affect
our liquidity and ability to make distributions to our shareholders.
Risks Related to Taxation
Our shareholders will be subject to tax on their share of the 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) would not be
required to register as an investment company under the Investment Company Act of 1940 and at
least 90% of our gross income for each taxable year constitutes
qualifying income within the
meaning of Section 7704(d) of the Internal Revenue Code of 1986, as
amended (the Code), on a
continuing basis, we will be treated, for U.S. federal income tax purposes, as a partnership and
not as an association or a publicly traded partnership taxable as a corporation. In that case
our shareholders will be subject to U.S. federal income tax and, possibly, state, local and
foreign income tax, on their share of the 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 those
results from that income. This may result from gains on the sale or exchange of stock or debt
of subsidiaries that will be allocated to shareholders who hold (or are deemed to hold) shares
on the day such gains were realized if there is no corresponding distribution of the proceeds
from such sales, or where a shareholder disposes of shares after an allocation of gain but
before proceeds (if any) are distributed by the Company. Shareholders may also realize income
in excess of distributions due to the Companys use of cash from operations or sales proceeds
for uses other than to make distributions to shareholders, including funding acquisitions,
satisfying short- and long-term working capital needs of our businesses, or satisfying known or
unknown liabilities. In addition, certain financial covenants with the 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
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.
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All of the Companys income could be subject to an entity-level tax in the United States, which
could result in a material reduction in cash flow available for distribution to holders of
shares of the Trust and thus could result in a substantial reduction in the value of the shares.
We do not expect the Company to be characterized as a corporation so long as it would not be
required to register as an investment company under the Investment Company Act of 1940 and 90%
or more of its gross income for each taxable year constitutes qualifying income. The Company
expects to receive more than 90% of its gross income each year from dividends, interest and
gains on sales of stock or debt instruments, including principally from or with respect to stock
or debt of corporations in which the Company holds a majority interest. The Company intends to
treat all such dividends, interest and gains as qualifying income.
If the Company fails to satisfy this qualifying income exception, the Company will be treated
as a corporation for U.S. federal (and certain state and local) income tax purposes, and would
be required to pay income tax at regular corporate rates on its income. Taxation of the Company
as a corporation could result in a material reduction in distributions to our shareholders and
after-tax return and, thus, could likely result in a reduction in the value of, or materially
adversely affect the market price of, the shares of the Trust.
A shareholder may recognize a greater taxable gain (or a smaller tax loss) on a disposition of
shares than expected because of the treatment of debt under the partnership tax accounting
rules.
We may incur debt for a variety of reasons, including for acquisitions as well as other
purposes. Under partnership tax accounting principles (which apply to the Company), debt of the
Company generally will be allocable to our shareholders, who will realize the benefit of
including their allocable share of the debt in the tax basis of their investment in shares. At
the time a shareholder later sells shares, the selling 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 IRS pays close attention to the proper application of tax
laws to partnerships. The present U.S. federal income tax treatment of an investment in 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 partnership for
U.S. federal income tax purposes that is not taxable as a corporation, affect or cause us to
change our investments and commitments, affect the tax considerations of an investment in us and
adversely affect an investment in our Shares. Our organizational documents and agreements
permit our board of directors to modify our operating agreement from time to time, without the
consent of the holders of shares, in order to address certain changes in U.S. federal income tax
regulations, legislation or interpretation. In some circumstances, such revisions could have a
material adverse impact on some or all of the holders of our shares. Moreover, we will apply
certain assumptions and conventions in an attempt to comply with applicable rules and to report
income, gain, deduction, loss and credit to holders in a manner that reflects such holders
beneficial ownership of partnership items, taking into account variation in ownership interests
during each taxable year because of trading activity. However, these assumptions and conventions
may not be in compliance with all aspects of applicable tax requirements. It is possible that
the IRS will assert successfully that the conventions and assumptions used by us do not satisfy
the technical requirements of the Code and/or Treasury regulations and could require that items
of income, gain, deductions, loss or credit, including interest deductions, be adjusted,
reallocated, or disallowed, in a manner that adversely affects holders of the Shares.
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Risks Relating Generally to Our Businesses
The recent disruption in the overall economy and the financial markets will continue to
adversely impact our business.
Many industries, including those in which our businesses participate, have been affected by
current economic factors, including the significant deterioration of global economic
conditions, declines in employment levels, and shifts in consumer spending patterns. The recent
disruptions in the overall economy and volatility in the financial markets have greatly
reduced, and may continue to reduce, consumer confidence in the economy, negatively affecting
consumer spending, which could be harmful to our financial position. Disruptions in the overall
economy may also lead to a lower collection rate on billings as consumers or businesses are
unable to pay their bills in a timely fashion. Decreased cash flow generated from our products
may adversely affect our financial position and our ability to fund our operations. In
addition, macro economic disruptions, as well as the restructuring of various commercial and
investment banking organizations, could adversely affect our ability to access the credit
markets. The disruption in the credit markets may also adversely affect the availability of
financing to support our strategy for growth through future acquisitions. There is a risk that
government responses to the disruptions in the financial markets will not restore consumer
confidence, stabilize the markets, or increase liquidity and the availability of credit.
Many of our businesses are, and may be, susceptible to economic downturns or recessions. An
economic downturn or recession may affect the ability of some or all of our businesses to generate
earnings and cash flow and distribute them to us in the form of interest and principal payments on
indebtedness and, from time to time, dividends on equity to enable us, first, to satisfy our
financial obligations and, second, to make distributions to our shareholders. Adverse economic
conditions also may decrease the value of collateral securing some of our loans and the value of
our equity investments. A failure of any of our businesses to satisfy financial or operating
covenants under its loan documents could lead to defaults and, potentially, termination of its
loans and foreclosure on its secured assets, which could jeopardize the ability of such business to
meet its obligations under the debt securities that we hold.
Impairment of our intangible assets could result in significant charges that would adversely
impact our future operating results.
We have significant intangible assets, including goodwill with an indefinite life, which are
susceptible to valuation adjustments as a result of changes in various factors or conditions.
The most significant intangible assets on our balance sheet are goodwill, technologies,
customer relationships and trademarks we acquired when we acquired our businesses and
Staffmark. Customer relationships are amortized on a straight line basis based upon the
pattern in which the economic benefits of customer relationships are being utilized. Other
identifiable intangible assets are amortized on a straightline basis over their estimated
useful lives. We assess the potential impairment of goodwill and indefinite lived intangible
assets on an annual basis, as well as whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. We assess definite lived intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors that could trigger an impairment, include the following:
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significant underperformance relative to historical or projected future operating results; |
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significant changes in the manner of or use of the acquired assets or the strategy for our overall business; |
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significant negative industry or economic trends; |
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significant decline in our stock price for a sustained period; |
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changes in our organization or management reporting structure could result in additional reporting units,
which may require alternative methods of estimating fair values or greater desegregation or aggregation in
our analysis by reporting unit; and |
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a decline in our market capitalization below net book value. |
As of December 31, 2008, we had identified indefinite lived intangible assets with a carrying
value in our financial statements of $36.8 million, and goodwill of $339.1 million. At
December 31, 2008, given the current disruption and uncertainty in the global economy, and our
revenues being lower then projected, we determined that the appropriate triggers had been
reached for an interim impairment test of goodwill at two of our reporting units, CBS Personnel
and American Furniture. We compared our carrying value of goodwill to the fair value of the
associated reporting unit, and determined that there has been no impairment of our goodwill at
this time
Further adverse changes in the operations of our businesses or other unforeseeable factors
could result in an impairment charge in future periods that would impact our results of
operations and financial position in that period.
Our businesses are subject to unplanned business interruptions which may adversely affect our
performance.
Operational interruptions and unplanned events at one or more of our production facilities, such
as explosions, fires, inclement weather, natural disasters, accidents, transportation
interruptions and supply could cause substantial losses in our production capacity. Furthermore,
because customers may be dependent on planned deliveries from us, customers that have to
reschedule their own operations due to our delivery delays may be able to pursue financial
claims against us, and we may incur costs to correct such problems in addition to any liability
resulting from such claims. Such interruptions may also harm our reputation among actual and
potential customers, potentially resulting in a loss of business. To the extent these losses are
not covered by insurance, our financial position, results of operations and cash flows may be
adversely affected by such events.
Our businesses rely and may rely on their intellectual property and licenses to use others
intellectual property, for competitive advantage. If our businesses are unable to protect their
intellectual property, are unable to obtain or retain licenses to use 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.
Each businesses success depends in part on its, or licenses to use others, brand names,
proprietary technology and manufacturing techniques. These businesses rely on a combination of
patents, trademarks, copyrights, trade secrets, confidentiality procedures and contractual
provisions to protect their intellectual property rights. The steps they have taken to protect
their intellectual property rights may not prevent third parties from using their intellectual
property and other proprietary information without their authorization or independently
developing intellectual property and other proprietary information that is similar. In addition,
the laws of foreign countries may not protect our businesses intellectual property rights
effectively or to the same extent as the laws of the United States. Stopping unauthorized use of
their proprietary information and intellectual property, and defending claims that they have
made unauthorized use of others proprietary information or intellectual property, may be
difficult, time-consuming and costly. The use of their intellectual property and other
proprietary information by others, and the use by others of their intellectual property and
proprietary information, could reduce or eliminate any competitive advantage they have
developed, cause them to lose sales or otherwise harm their business.
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.
60
The operations and research and development of some of our businesses services and technology
depend on the collective experience of their technical employees. If these employees were to
leave our businesses and take this knowledge, our businesses operations and their ability to
compete effectively could be materially adversely impacted.
The future success of some of our businesses depends upon the continued service of their
technical personnel who have developed and continue to develop their technology and products. If
any of these employees leave our businesses, the loss of their technical knowledge and
experience may materially adversely affect the operations and research and development of
current and future services. We may also be unable to attract technical individuals with
comparable experience because competition for such technical personnel is intense. If our
businesses are not able to replace their technical personnel with new employees or attract
additional technical individuals, their operations may suffer as they may be unable to keep up
with innovations in their respective industries. As a result, their ability to continue to
compete effectively and their operations may be materially adversely affected.
If our businesses are unable to continue the technological innovation and successful commercial
introduction of new products and services, their financial condition, business and results of
operations could be materially adversely affected.
The industries in which our businesses operate, or may operate, experience periodic
technological changes and ongoing product improvements. Their results of operations depend
significantly on the development of commercially viable new products, product grades and
applications, as well as production technologies and their ability to integrate new
technologies. Our future growth will depend on their ability to gauge the direction of the
commercial and technological progress in all key end-use markets and upon their ability to
successfully develop, manufacture and market products in such changing end-use markets. In this
regard, they must make ongoing capital investments.
In addition, their customers may introduce new generations of their own products, which may
require new or increased technological and performance specifications, requiring our businesses
to develop customized products. Our businesses may not be successful in developing new products
and technology that satisfy their customers demand and their customers may not accept any of
their new products. If our businesses fail to keep pace with evolving technological innovations
or fail to modify their products in response to their customers needs in a timely manner, then
their financial condition, business and results of operations could be materially adversely
affected as a result of reduced sales of their products and sunk developmental costs. These
developments may require our personnel staffing business to seek better educated and trained
workers, who may not be available in sufficient numbers.
Our businesses could experience fluctuations in the costs of raw materials as a result of
inflation and other economic conditions, which fluctuations could have a material adverse effect
on their financial condition, business and results of operations.
Changes in inflation could materially adversely affect the costs and availability of raw
materials used in our manufacturing businesses, and changes in fuel costs likely will affect the
costs of transporting materials from our suppliers and shipping goods to our customers, as well
as the effective areas from which we can recruit temporary staffing personnel. For example, for
Advanced Circuits, the principal raw materials consist of copper and glass and represent
approximately 16.1% of net sales in 2008. Prices for these key raw materials may fluctuate
during periods of high demand. The ability by these businesses to offset the effect of
increases in raw material prices by increasing their prices is uncertain. If these businesses
are unable to cover price increases of these raw materials, their financial condition, business
and results of operations could be materially adversely affected.
Our businesses do not have and may not have long-term contracts with their customers and clients
and the loss of customers and clients could materially adversely affect their financial
condition, business and results of operations.
Our businesses are and may be, based primarily upon individual orders and sales with their
customers and clients. Our businesses historically have not entered into long-term supply
contracts with their customers and clients. As such, their customers and clients could cease
using their services or buying their products from them
at any time and for any 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.
61
Our businesses are and may be subject to federal, state and foreign environmental laws and
regulations that expose them to potential financial liability. Complying with applicable
environmental laws requires significant resources, and if our businesses fail to comply, they
could be subject to substantial liability.
Some of the facilities and operations of our businesses are and may be subject to a variety of
federal, state and foreign environmental laws and regulations including laws and regulations
pertaining to the handling, storage and transportation of raw materials, products and wastes,
which require and will continue to require significant expenditures to remain in compliance with
such laws and regulations currently in place and in the future. Compliance with current and
future environmental laws is a major consideration for our businesses as any material violations
of these laws can lead to substantial liability, revocations of discharge permits, fines or
penalties. Because some of our businesses use hazardous materials and generate hazardous wastes
in their operations, they may be subject to potential financial liability for costs associated
with the investigation and remediation of their own sites, or sites at which they have arranged
for the disposal of hazardous wastes, if such sites become contaminated. Even if they fully
comply with applicable environmental laws and are not directly at fault for the contamination,
our businesses may still be liable. Costs associated with these risks could have a material
adverse effect on our financial condition, business and results of operations.
Defects in the products provided by our companies could result in financial or other damages to
those customers, which could result in reduced demand for our companies products and/or
liability claims against our companies.
Some of the products our businesses produce could potentially result in product liability suits
against them. Some of our companies manufacture products to customer specifications that are
highly complex and critical to customer operations. Defects in products could result in
customer dissatisfaction or a reduction in or cancellation of future purchases or liability
claims against our companies. If these defects occur frequently, our reputation may be
impaired. Defects in products could also result in financial or other damages to customers, for
which our companies may be asked or required to compensate their customers. Any of these
outcomes could negatively impact our financial condition, business and results of operations.
Some of our businesses are subject to certain risks associated with the movement of businesses
offshore.
Some of our businesses are potentially at risk of losing business to competitors operating in
lower cost countries. An additional risk is the movement offshore of some of our businesses
customers, leading them to procure products or services from more closely located companies.
Either of these factors could negatively impact our financial condition, business and results of
operations.
Loss of key customers of some of our businesses could negatively impact financial condition.
Some of our businesses have significant exposure to certain key customers, the loss of which
could negatively impact our financial condition, business and results of operations.
Our businesses are subject to certain risks associated with their foreign operations or business
they conduct in foreign jurisdictions.
Some of our businesses have and may have operations or conduct business outside the United
States. Certain risks are inherent in operating or conducting business in foreign
jurisdictions, including exposure to local economic conditions; difficulties in enforcing
agreements and collecting receivables through certain foreign legal systems; longer payment
cycles for foreign customers; adverse currency exchange controls; exposure to risks associated
with changes in foreign exchange rates; potential adverse changes in political environments;
withholding taxes and restrictions on the withdrawal of foreign investments and earnings; export
and import restrictions; difficulties in enforcing intellectual property rights; and required
compliance with a variety of foreign laws and regulations. These risks individually and
collectively have the potential to negatively impact our financial condition, business and
results of operations.
62
Risks Related to Advanced Circuits
Unless Advanced Circuits is able to respond to technological change at least as quickly as its
competitors, its services could be rendered obsolete, which could materially adversely affect
its financial condition, business and results of operations.
The market for Advanced Circuits services is characterized by rapidly changing technology and
continuing process development. The future success of its business will depend in large part
upon its ability to maintain and enhance its technological capabilities, retain qualified
engineering and technical personnel, develop and market services that meet evolving customer
needs and successfully anticipate and respond to technological changes on a cost-effective and
timely basis. Advanced Circuits core manufacturing capabilities are for 2 to 12 layer printed
circuit boards. Trends towards miniaturization and increased performance of electronic products
are dictating the use of printed circuit boards with increased layer counts. If this trend
continues Advanced Circuits may not be able to effectively respond to the technological
requirements of the changing market. If it determines that new technologies and equipment are
required to remain competitive, the development, acquisition and implementation of these
technologies may require significant capital investments. It may be unable to obtain capital for
these purposes in the future, and investments in new technologies may not result in commercially
viable technological processes. Any failure to anticipate and adapt to its customers changing
technological needs and requirements or retain qualified engineering and technical personnel
could materially adversely affect its financial condition, business and results of operations.
Advanced Circuits customers operate in industries that experience rapid technological change
resulting in short product life cycles and as a result, if the product life cycles of its
customers slow materially, and research and development expenditures are reduced, its financial
condition, business and results of operations will be materially adversely affected.
Advanced Circuits customers compete in markets that are characterized by rapidly changing
technology, evolving industry standards and continuous improvement in products and services.
These conditions frequently result in short product life cycles. As professionals operating in
research and development departments represent the majority of Advanced Circuits net sales, the
rapid development of electronic products is a key driver of Advanced Circuits sales and
operating performance. Any decline in the development and introduction of new electronic
products could slow the demand for Advanced Circuits services and could have a material adverse
effect on its financial condition, business and results of operations.
Electronics manufacturing services corporations are increasingly acting as intermediaries,
positioning themselves between PCB manufacturers and OEMs, which could reduce operating margins.
Advanced Circuits OEM customers are increasingly outsourcing the assembly of equipment to third
party manufacturers. These third party manufacturers typically assemble products for multiple
customers and often purchase circuit boards from Advanced Circuits in larger quantities than OEM
manufacturers. The ability of Advanced Circuits to sell products to these customers at margins
comparable to historical averages is uncertain. Any material erosion in margins could have a
material adverse effect on Advanced Circuits financial condition, business and results of
operations.
Risks Related to American Furniture
Competition from larger furniture manufacturers may adversely affect American Furniture
Manufacturings business and operating results.
The residential upholstered furniture industry is highly competitive. Certain of American
Furnitures competitors are larger, have broader product lines and offer widely advertised,
well-known, branded products. If such larger competitors introduce additional products in the
promotional segment of the upholstered furniture market, the segment in which American Furniture
primarily participates, it may negatively impact American Furnitures market share and financial
performance.
63
Risks Related to Anodyne
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
FDCA (21 USC §321(h), and, as such, are subject to the requirements of the FDCA and certain
rules and regulations of the FDA. Prior to our acquisition of Anodyne, one of its subsidiaries
received a warning letter from the FDA in connection with certain deficiencies identified during
a regular FDA audit, including noncompliance with certain design control requirements, certain
of the good manufacturing practice regulations defined in 21 C.F.R. 820 and certain record
keeping requirements. Anodynes subsidiary has undertaken corrective measures to address the
deficiencies and continues to fully cooperate with the FDA. Anodyne is vulnerable to actions
that may be taken by the FDA which have a material adverse effect on Anodyne and/or its
business. The FDA has the authority to inspect without notice, and to take any disciplinary
action that it sees fit.
A change in Medicare Reimbursement Guidelines may reduce demand for Anodynes products.
Certain changes in Medicare Reimbursement Guidelines may reduce demand for medical support
surfaces and have a material effect on Anodynes operating performance.
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.
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.
64
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 Personnel may become ineligible to self-insure against its workers compensation exposure for
certain employees and its 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 in certain
states. It remains eligible to so self-insure provided it continues to meet certain financial and
other requirements. CBS Personnels decline in operations resulting from the current significant
economic downturn increases the risk that CBS Personnel will fail to meet these self-insurance
requirements, which failure could materially increase its workers compensation insurance costs.
Additionally, 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.
During the current significant economic downturn, CBS Personnels clients are likely to use fewer
temporary and contract workers and could become unable to pay CBS Personnel for its services on a
timely basis or at all, which would materially adversely affect our business.
Because demand for recruitment services is sensitive to changes in the level of economic activity,
our business will continue to suffer during this economic downturn. As economic activity begins to
slow down, companies tend to reduce their use of temporary and contract workers before undertaking
layoffs of their regular employees, resulting in decreased demand for temporary and contract
workers. Significant declines in demand, and thus in revenues, are resulting in expense
de-leveraging, which in turn results in lower profit levels.
In addition, during economic downturns companies may slow the rate at which they pay their vendors
or become unable to pay their debts as they become due. If any of our significant clients does not
pay amounts owed to us in a timely manner or becomes unable to pay such amounts to CBS Personnel at
a time when it has substantial amounts receivable from such client, CBS Personnels cash flow and
profitability may suffer.
State unemployment insurance expense is a direct cost of doing business in the staffing industry.
State unemployment tax rates are established based on a companys specific experience rate of
unemployment claims and a states required funding for total claims. Economic downturns may result
in a higher occurrence of unemployment claims resulting in higher state unemployment tax rates.
Additionally, as states are paying more in total prolonged claims during an economic downturn,
states may increase unemployment tax rates to employers, regardless of the employers specific
experience. This would result in higher direct costs to CBS Personnel.
65
Risks Related to HALO
Increases in the portion of existing customers and potential customers buying directly from
manufacturers could have a material adverse affect on the business of HALO.
The promotional products industry supply chain is comprised of multiple levels. As a
distributor, HALO does not manufacturer or decorate the promotional products it sells. 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 affect on the
business of HALO.
The loss of a significant number of account executives could adversely affect the business of
HALO.
HALO relies on its large staff of account executives to develop and maintain relationships with
end customers. 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.
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
(drop-shipments). Delays in the shipment of products or supply shortages in promotional
products in high demand could affect HALOs standing with its end customers and adversely affect
HALOs results of operations.
Risks Related to Fox
Growth in popularity of alternative recreational activities may reduce demand for mountain bikes
and off-road products which would reduce demand for Foxs products
Mountain biking and other off-road sports compete against numerous recreational activities for
share of time and spend of enthusiasts. Any growth in popularity of other outdoor activities at
the expense of mountain biking and off-road sports could lead to a decrease in demand for the
companys products and could materially adversely affect Foxs financial condition, business
and results of operations.
66
ITEM 1B. UNRESOLVED STAFF COMMENTS
NONE
ITEM 2. PROPERTIES
The Company
Our corporate offices are located in Westport, Connecticut, where we lease approximately 1,500
square feet from our Manager.
Advanced Circuits
Advanced Circuits operations are located in a 61,058 square foot building in Aurora, Colorado.
This facility is leased and comprises both the factory and office space. The lease term is for 15
years with a renewal option for an additional 10 years.
American Furniture
American Furniture operates primarily from a manufacturing and warehousing facility located in
Ecru, Mississippi, of which approximately 750,000 square feet was refurbished in 2008 as a result
of damage caused by a fire in 2008. This 1.1 million square foot facility includes 350,000 square
feet of manufacturing space, 750,000 square feet of warehouse space and 82 shipping docks. The
facility operates at an average of 73% of total capacity. AFM can add additional manufacturing
lines within its existing footprint to accommodate demand during peak times. In addition to AFMs
primary manufacturing facility, AFM leases approximately 200,000 square feet of warehouse and small
manufacturing space within the vicinity of its primary Ecru facility. AFM also leases showroom
space in High Point, North Carolina and Tupelo Mississippi, allowing it to showcase its products to
buyers and during trade shows held in these areas.
On February 12, 2008, American Furnitures 1.1 million square foot corporate office and
manufacturing facility in Ecru, Mississippi was partially destroyed in a fire. Approximately
750,000 square feet of the facility was impacted by the fire. The executive offices were
fundamentally unaffected. The recliner and motion plant, although largely unaffected, suffered
some smoke damage but resumed operations on February 21, 2008. There were no injuries related to
the fire.
Anodyne
Anodyne leases a 32,000 square foot facility in Coral Springs, Florida, which houses its
manufacturing and distribution operations for the east coast. It also leases an 80,000 square foot
facility in Corona, California, which houses the manufacturing and distribution facilities for the
west coast. Anodyne also leases a 7,500 square foot facility in Oklahoma City, Oklahoma, which
houses its PrimaTech Medical Systems subsidiary.
CBS Personnel
CBS Personnels principal executive offices are located in Cincinnati, Ohio where it leases 38,867
square feet of office space. CBS Personnel provides staffing services through 233 branch offices
located in 28 states which include branch offices and locations for its recent Staffmark
acquisition. Lease terms for the branch offices typically run from 3 to 5 years.
Fox
Foxs corporate headquarters and main manufacturing facilities are located in an 86,000 square foot
facility located in Watsonville California. In addition, Fox leases five other smaller facilities
totaling approximately 61,000 square feet in the surrounding Watsonville area.
HALO
HALO distributes its products through a leased 40,000 square foot office facility and a 57,000
square foot fulfillment warehouse, both of which are located in Sterling, Illinois. Due to its
high percentage of drop shipments, HALO is able to operate from a much smaller warehouse than a
similar size company with a traditional inventory-based business model. HALO also maintains a
small IT department in Oak Brook, Illinois and an office for its CEO in Chicago.
67
The following table shows the number of offices located in each state and the function of
each office as of December 31, 2008.
|
|
|
|
|
|
|
|
|
State |
|
Function |
|
Offices |
|
Square feet |
|
California |
|
Sales |
|
5 |
|
|
22,595 |
|
Illinois |
|
Administration |
|
2 |
|
|
40,000 |
|
|
|
Information Technology |
|
1 |
|
|
4,766 |
|
|
|
Warehousing |
|
2 |
|
|
57,000 |
|
Louisiana |
|
Sales |
|
1 |
|
|
1,919 |
|
Ohio |
|
Administration |
|
2 |
|
|
3,796 |
|
Tennessee |
|
Sales |
|
1 |
|
|
8,804 |
|
Texas |
|
Sales |
|
2 |
|
|
20,292 |
|
Missouri |
|
Sales |
|
1 |
|
|
10,000 |
|
Kansas |
|
Sales |
|
1 |
|
|
1,500 |
|
Maryland |
|
Sales |
|
1 |
|
|
800 |
|
Florida |
|
Sales |
|
1 |
|
|
1,000 |
|
Pennsylvania |
|
Sales |
|
1 |
|
|
842 |
|
We believe that our properties at each of our businesses are sufficient to meet our present needs
and we do not anticipate any difficulty in securing additional space, as needed, on acceptable
terms.
68
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal proceedings. While
the ultimate resolution of these matters has yet to be determined, we do not believe that their
outcome will have a material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
69
Part II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market Information
Our Trust stock trades on the Nasdaq Global Select Market under the symbol CODI. The following
table sets forth the high and low closing prices per share as reported by the Nasdaq Global Select
during the periods indicated. The highest and lowest closing prices per share of Trust stock were
$18.32 and $8.19, respectively for the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
High |
|
Low |
|
Distribution Declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
$ |
18.32 |
|
|
$ |
16.75 |
|
|
$ |
0.30 |
|
June 30, 2007
|
|
|
18.17 |
|
|
|
15.58 |
|
|
|
0.30 |
|
September 30, 2007
|
|
|
18.23 |
|
|
|
13.59 |
|
|
|
0.325 |
|
December 31, 2007
|
|
|
17.28 |
|
|
|
14.29 |
|
|
|
0.325 |
|
March 31, 2008
|
|
|
15.33 |
|
|
|
11.59 |
|
|
|
0.325 |
|
June 30, 2008
|
|
|
13.70 |
|
|
|
11.39 |
|
|
|
0.325 |
|
September 30, 2008
|
|
|
14.56 |
|
|
|
10.01 |
|
|
|
0.34 |
|
December 31, 2008
|
|
|
14.15 |
|
|
|
8.19 |
|
|
|
0.34 |
|
COMPARATIVE PERFORMANCE OF SHARES OF TRUST STOCK
The performance graph shown below compares the change in cumulative total shareholder return
on shares of Trust stock with the NASDAQ Stock Market Index (US) and the NASDAQ Other Finance Index
(US) from May 16, 2006, when we completed our initial public offering, through the quarter ended
December 31, 2008. The graph sets the beginning value of shares of Trust stock and the indices at
$100, and assumes that all quarterly dividends were reinvested at the time of payment. This graph
does not forecast future performance of shares of Trust stock.
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
Data |
|
|
|
|
|
June 30, 2006 |
|
2006 |
|
2006 |
Compass Diversified Holdings |
|
|
|
|
|
$ |
94.88 |
|
|
$ |
102.61 |
|
|
$ |
116.66 |
|
NASDAQ Stock Market Index |
|
|
|
|
|
$ |
97.44 |
|
|
$ |
101.31 |
|
|
$ |
108.35 |
|
NASDAQ Other Finance Index |
|
|
|
|
|
$ |
94.03 |
|
|
$ |
104.02 |
|
|
$ |
107.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
Data |
|
March 31, 2007 |
|
June 30, 2007 |
|
2007 |
|
2007 |
Compass Diversified Holdings |
|
$ |
116.13 |
|
|
$ |
125.17 |
|
|
$ |
115.39 |
|
|
$ |
109.84 |
|
NASDAQ Stock Market Index |
|
$ |
108.64 |
|
|
$ |
116.78 |
|
|
$ |
121.19 |
|
|
$ |
118.98 |
|
NASDAQ Other Finance Index |
|
$ |
104.70 |
|
|
$ |
112.86 |
|
|
$ |
107.18 |
|
|
$ |
108.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
Data |
|
March 31, 2008 |
|
June 30, 2008 |
|
2008 |
|
2008 |
Compass Diversified Holdings |
|
$ |
100.37 |
|
|
$ |
91.09 |
|
|
$ |
109.94 |
|
|
$ |
94.32 |
|
NASDAQ Stock Market Index |
|
$ |
102.24 |
|
|
$ |
102.86 |
|
|
$ |
93.84 |
|
|
$ |
70.75 |
|
NASDAQ Other Finance Index |
|
$ |
86.86 |
|
|
$ |
85.52 |
|
|
$ |
90.56 |
|
|
$ |
57.91 |
|
Shareholders
As of February 27, 2009 we had 31,525,000 shares of Trust stock outstanding that were held by ten
holders of record; however, we believe the number of beneficial owners of our shares is over 7,000.
Distributions
For the years 2007 and 2008 we have declared and paid quarterly cash distributions to holders of
record as follows:
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Declaration Date |
|
Payment Date |
|
Distribution Per Share |
|
March 31, 2007
|
|
April 5, 2007
|
|
April 24, 2007
|
|
$ |
0.30 |
|
June 30, 2007
|
|
July 10, 2007
|
|
July 27, 2007
|
|
$ |
0.30 |
|
September 30, 2007
|
|
October 9, 2007
|
|
October 26, 2007
|
|
$ |
0.325 |
|
December 31, 2007
|
|
January 11, 2008
|
|
January 30, 2008
|
|
$ |
0.325 |
|
March 31, 2008
|
|
April 5, 2008
|
|
April 25, 2008
|
|
$ |
0.325 |
|
June 30, 2008
|
|
July 10, 2008
|
|
July 29, 2008
|
|
$ |
0.325 |
|
September 30, 2008
|
|
October 9, 2008
|
|
October 31, 2008
|
|
$ |
0.34 |
|
December 31, 2008
|
|
January 8, 2009
|
|
January 30, 2009
|
|
$ |
0.34 |
|
We intend to continue to declare and pay regular quarterly cash distributions on all outstanding
shares through fiscal 2009. Our distribution policy is based on the cash flows of our businesses.
The declaration and payment of any future distribution is subject to the approval of the
Companys board of directors, which is required to include a majority of independent directors.
The Companys board of directors takes 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 will be adversely impacted due to unknown
liabilities, government regulations, financial covenants of the Revolving Credit Facility 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 additional debt in the
future to acquire new businesses, which debt will have substantial debt commitments, which must be
satisfied before we can make distributions. These factors could affect our ability to continue to
make distributions. See Managements Discussion and Analysis of Financial Condition and Results
of Operations Liquidity and Capital Resources in Part II, Item 7.
71
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical and other data of the Company and should be read
in conjunction with the more detailed consolidated financial statements included elsewhere in this
report.
Selected financial data below includes the results of operations, cash flow and balance sheet data
of the Company for the years ended December 31, 2008, 2007, 2006 and 2005. We were incorporated on
November 18, 2005 (inception). Financial data included for the year ended December 31, 2005,
includes the minimal activity experienced from inception to December 31, 2005. We completed our
IPO on May 16, 2006 and used the proceeds of the IPO and separate private placement transactions,
that closed in conjunction with our IPO, and from our third party credit facility, to purchase
controlling interests in four of our initial operating subsidiaries. The following table details
our acquisitions and dispositions subsequent to our IPO.
|
|
|
|
|
Acquisitions: |
|
Acquisition Date |
|
Disposition Date |
Advanced Circuits(1)
|
|
May 16, 2006
|
|
n/a |
CBS Personnel(1)
|
|
May 16, 2006
|
|
n/a |
Crosman(1)
|
|
May 16, 2006
|
|
January 5, 2007 |
Silvue(1)
|
|
May 16, 2006
|
|
June 25, 2008 |
Anodyne
|
|
August 1, 2006
|
|
n/a |
Aeroglide
|
|
February 28, 2007
|
|
June 24, 2008 |
HALO
|
|
February 28, 2007
|
|
n/a |
American Furniture
|
|
August 31, 2007
|
|
n/a |
Fox
|
|
January 4, 2008
|
|
n/a |
Staffmark(2)
|
|
January 21, 2008
|
|
n/a |
|
|
|
|
(1) |
|
Represent initial operating subsidiaries. |
|
(2) |
|
Staffmark was acquired by our operating segment CBS Personnel. |
The operating results for Crosman are reflected as discontinued operations in 2006 and as such are
not included in the data below. The operating results for Aeroglide are reflected as discontinued
operations in 2008 and 2007 and as such are not included in the data below. The operating results
for Silvue are reflected as discontinued operations in 2008, 2007 and 2006 and as such are not
included in the data below. Financial data included below therefore only includes activity in our
operating subsidiaries from their respective dates of acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,538,473 |
|
|
$ |
841,791 |
|
|
$ |
395,173 |
|
|
$ |
|
|
Cost of sales |
|
|
1,196,206 |
|
|
|
636,008 |
|
|
|
307,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
342,267 |
|
|
|
205,783 |
|
|
|
88,159 |
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staffing |
|
|
102,438 |
|
|
|
56,207 |
|
|
|
34,345 |
|
|
|
|
|
Selling, general and administrative |
|
|
165,768 |
|
|
|
94,426 |
|
|
|
31,605 |
|
|
|
1 |
|
Supplemental put expense |
|
|
6,382 |
|
|
|
7,400 |
|
|
|
22,456 |
|
|
|
|
|
Management fees |
|
|
15,205 |
|
|
|
10,120 |
|
|
|
4,158 |
|
|
|
|
|
Amortization expense |
|
|
24,605 |
|
|
|
12,679 |
|
|
|
5,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
27,869 |
|
|
|
24,951 |
|
|
|
(10,219 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
324 |
|
|
|
(946 |
) |
|
|
(29,080 |
) |
|
|
(1 |
) |
Income and gain from discontinued operations |
|
|
77,970 |
|
|
|
41,314 |
|
|
|
9,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) , (2) |
|
$ |
78,294 |
|
|
$ |
40,368 |
|
|
$ |
(19,249 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
40,549 |
|
|
$ |
41,772 |
|
|
$ |
20,563 |
|
|
$ |
|
|
Cash used in investing activities |
|
|
(22,542 |
) |
|
|
(114,158 |
) |
|
|
(362,286 |
) |
|
|
|
|
Cash (used in) provided by financing activities |
|
|
(39,812 |
) |
|
|
184,882 |
|
|
|
351,073 |
|
|
|
100 |
|
Net (decrease) increase in cash and cash equivalents |
|
|
(21,885 |
) |
|
|
112,352 |
|
|
|
9,610 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted income (loss) from
continuing operations per share |
|
$ |
0.01 |
|
|
$ |
(0.04 |
) |
|
$ |
(2.29 |
) |
|
$ |
|
|
Basic and fully diluted income from discontinued
operations per share |
|
|
2.47 |
|
|
|
1.50 |
|
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted net income (loss) per share |
|
$ |
2.48 |
|
|
$ |
1.46 |
|
|
$ |
(1.52 |
) |
|
$ |
|
|
|
|
|
|
|
(1) |
|
Includes gains on the sales of Aeroglide and Silvue in 2008 of $34.0 million and $39.4 million,
respectively, and Crosman in 2007 of $36.0 million. |
|
(2) |
|
Includes a charge to net income of $10.0 million for distributions made at the subsidiary (ACI)
level in excess of cumulative earnings in 2007. |
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
335,201 |
|
|
$ |
299,241 |
|
|
$ |
135,121 |
|
|
$ |
3,408 |
|
Total assets |
|
|
984,336 |
|
|
|
828,002 |
|
|
|
496,382 |
|
|
|
3,408 |
|
Current liabilities |
|
|
139,370 |
|
|
|
106,613 |
|
|
|
155,534 |
|
|
|
3,309 |
|
Long-term debt |
|
|
151,000 |
|
|
|
148,000 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
440,458 |
|
|
|
373,285 |
|
|
|
214,759 |
|
|
|
3,309 |
|
Minority interests |
|
|
79,431 |
|
|
|
21,867 |
|
|
|
24,909 |
|
|
|
100 |
|
73
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This item 7 contains forward-looking statements. Forward-looking statements in this Annual Report
on Form 10-K are subject to a number of risks and uncertainties, some of which are beyond our
control. Our actual results, performance, prospects or opportunities could differ materially from
those expressed in or implied by the forward-looking statements. Additional risks of which we are
not currently aware or which we currently deem immaterial could also cause our actual results to
differ, including those discussed in the sections entitled Forward-Looking Statements and Risk
Factors included elsewhere in this Annual Report.
Overview
Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November
18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, was also
formed on November 18, 2005. In accordance with the Trust Agreement, the Trust is sole owner of
100% of the Trust Interests (as defined in the LLC Agreement) of the Company and, pursuant to the
LLC Agreement, the Company has outstanding, the identical number of Trust Interests as the number
of outstanding shares of the Trust. The Manager is the sole owner of the Allocation Interests of
the Company. The Company is the operating entity with a board of directors and other corporate
governance responsibilities, similar to that of a Delaware corporation.
The Trust and the Company were formed to acquire and manage a group of small and middle-market
businesses headquartered in North America. We characterize small to middle market businesses as
those that generate annual cash flows of up to $60 million. We focus on companies of this size
because of our belief that these companies are often more able to achieve growth rates above those
of their relevant industries and are also frequently more susceptible to efforts to improve
earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
|
|
|
North American base of operations; |
|
|
|
|
stable and growing earnings and cash flow; |
|
|
|
|
maintains a significant market share in defensible industry niche (i.e., has a reason
to exist); |
|
|
|
|
solid and proven management team with meaningful incentives; |
|
|
|
|
low technological and/or product obsolescence risk; and |
|
|
|
|
a diversified customer and supplier base. |
Our management 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. |
74
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 company formation
On May 16, 2006, we completed our initial public offering of 13,500,000 shares of the Trust at an
offering price of $15.00 per share (the IPO). Total net proceeds from the IPO, after deducting
the underwriters discounts, commissions and financial advisory fee, were approximately $188.3
million. On May 16, 2006, we also completed the private placement of 5,733,333 shares to CGI for
approximately $86.0 million and completed the private placement of 266,667 shares to Pharos I LLC,
an entity controlled by Mr. Massoud, the Chief Executive Officer of the Company, and owned by our
management team, for approximately $4.0 million. CGI also purchased 666,667 shares for $10.0
million through the IPO.
Subsequent to the IPO the Companys board of directors engaged the Manager to externally manage the
day-to-day operations and affairs of the Company, oversee the management and operations of the
businesses and to perform those services customarily performed by executive officers of a public
Company.
From May 16, 2006 through December 31, 2008, we purchased nine businesses (each of our businesses
is treated as a separate business segment) and disposed of three, as follows:
Acquisitions
|
|
|
On May 16, 2006, we made loans to and purchased a controlling interest in CBS
Personnel for approximately $128 million. As of December 31, 2008, we own
approximately 66.4% of the common stock on a primary basis and 62.4% on a fully diluted
basis. |
|
|
|
|
On May 16, 2006, we made loans to and purchased a controlling interest in
Crosman for approximately $73 million representing at the time of purchase
approximately 75.4% on both a primary and fully diluted basis. |
|
|
|
|
On May 16, 2006, we made loans to and purchased a controlling interest in
Advanced Circuits for approximately $81 million. As of December 31, 2008, we
own approximately 70.2% of the common stock on a primary and fully diluted basis. |
|
|
|
|
On May 16, 2006, we made loans to and purchased a controlling interest in Silvue
for approximately $36 million, representing at the time of purchase approximately
72.3% of the outstanding stock on both a primary and fully diluted basis. |
|
|
|
|
On August 1, 2006, we made loans to and purchased a controlling interest in
Anodyne for approximately $31 million. As of December 31, 2008, we own
approximately 67.0% of the common stock on a primary basis and 57.0% on a fully diluted
basis. |
|
|
|
|
On February 28, 2007, we made loans to and purchased a controlling interest in
Aeroglide for approximately $58 million, representing at the time of purchase
approximately 88.9% of the outstanding stock on a primary basis and approximately 73.9%
on a fully diluted basis. |
|
|
|
|
On February 28, 2007, we made loans to and purchased a controlling interest in
HALO was purchased for approximately $62 million. As of December 31, 2008, we
own approximately 88.3% of the common stock on a primary basis and 73.6% on a fully
diluted basis. |
|
|
|
|
On August 28, 2007, we made loans to and purchased a controlling interest in
American Furniture for approximately $97 million. As of December 31, 2008, we
own approximately 93.9% of the common stock on a primary basis and 84.5% on a fully
diluted basis. |
75
|
|
|
On January 4, 2008, we made loans to and purchased a controlling interest in
Fox for approximately $80.4 million. As of December 31, 2008, we own
approximately 75.5% of the common stock on a primary basis and 68.0% on a fully diluted
basis. |
Dispositions
|
|
|
On January 5, 2007, we sold all of our interest in Crosman, for approximately $143
million. We recorded a gain on the sale in the first quarter of 2007 of approximately
$36 million. |
|
|
|
|
On June 24, 2008, we sold all of our interest in Aeroglide, for approximately $95
million. We recorded a gain on the sale in the second quarter of 2008 of approximately
$34 million. |
|
|
|
|
On June 25, 2008, we sold all of our interest in Silvue, for approximately $95
million. We recorded a gain on the sale in the second quarter of 2008 of approximately
$39 million. |
We are dependent on the earnings of, and cash receipts from, the businesses that we own to meet
our corporate overhead and management fee expenses and to pay distributions. These earnings and
distributions, net of any minority interests in these businesses, will be available:
|
|
|
First, to meet capital expenditure requirements, management fees and corporate overhead
expenses; |
|
|
|
|
Second, to fund distributions from the businesses to the Company; and |
|
|
|
|
Third, to be distributed by the Trust to shareholders. |
2008 Highlights
Acquisition of Fox Factory
On January 4, 2008, we purchased a controlling interest in Fox, with operations headquartered in Watsonville,
California. Fox is a designer, manufacturer and marketer of high end suspension products for
mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox both acts as a
tier one supplier to leading action sport original equipment manufacturers and provides
after-market products to retailers and distributors. We made loans to and purchased a controlling
interest in Fox for approximately $80.4 million, representing approximately 75.5% of the
outstanding equity
Acquisition of Staffmark
On January 21, 2008, CBS Personnel purchased all of the outstanding equity interests of Staffmark.
Staffmark is a leading provider of commercial staffing services in the United States. Staffmark
provides staffing services in over 30 states through over 200 branches and on-site locations. The
majority of Staffmarks revenues are derived from light industrial staffing, with the balance of
revenues derived from administrative and transportation staffing, permanent placement services and
managed solutions. Similar to CBS Personnel, Staffmark was one of the largest privately held
staffing companies in the United States. CBS Personnel repaid approximately $80 million of
Staffmark debt and issued CBS Personnel common stock valued at $47.9 million, representing
approximately 28% of CBS Personnels outstanding common stock, on a fully diluted basis. As a
result of the Staffmark acquisition we now own approximately 66.4% of the outstanding stock of CBS
personnel on a primary basis and approximately 62.4% on a fully diluted basis.
Aeroglide disposition
On June 24, 2008, we sold our majority owned subsidiary Aeroglide, for a total enterprise value of
approximately $95.0 million. Our share of the net proceeds, after accounting for the redemption of
Aeroglides minority holders and payment of transaction expenses totaled $85.6 million. Our Manager
was paid a profit allocation from this sale in August 2008, totaling approximately $7.3 million. We
recognized a gain on the sale of approximately $34.0 million, or $1.08 per share.
76
Silvue disposition
On June 25, 2008, we sold our majority owned subsidiary Silvue, for a total enterprise value of
$95.0 million. Our share of the net proceeds, after accounting for the redemption of Aeroglides
minority holders and payment of transaction expenses totaled $71.3 million. Our Manager was paid a
profit allocation from this sale in August 2008, totaling approximately $7.7 million. We recognized
a gain on the sale of approximately $39.4 million, or $1.25 per share.
2008 Distributions
We increased our quarterly distribution to $0.34 per share during the third quarter of 2008.
For the year we declared distributions to our shareholders totaling $1.33 per share.
Areas for focus in 2009
The areas of focus for 2009, which are generally applicable to each of our businesses, include:
|
|
|
Taking advantage, where possible, of the current economic downturn by growing market
share in each of our market niche leading companies at the expense of less well
capitalized competitors; |
|
|
|
|
Achieving sales growth, technological excellence and manufacturing capability through
global expansion; |
|
|
|
|
Continuing to grow through disciplined, strategic acquisitions and rigorous integration
processes; |
|
|
|
|
Aggressively pursuing expense reduction and cost savings through contraction in
discretionary spending and capital expenditures, and reductions in workforce and
production levels in response to lower production volume; |
|
|
|
|
Driving free cash flow through increased net income and effective working capital
management enabling continued investment in our businesses, strategic acquisitions, and
enabling us to return value to our shareholders; and |
|
|
|
|
Sharply curtailing costs to help counteract the current global economic crisis. |
Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:
|
|
|
|
|
|
|
|
|
May 16, 2006 |
|
August 1, 2006 |
|
February 28, 2007 |
|
August 31, 2007 |
|
January 4, 2008 |
Advanced Circuits
CBS Personnel
|
|
Anodyne
|
|
HALO
|
|
American Furniture
|
|
Fox |
Fiscal 2007 and 2008 represents a full year of operating results included in our consolidated
results of operations for only three of our businesses. The remaining three businesses were
acquired during fiscal 2007 and 2008 (see table above). As a result, we cannot provide a
meaningful comparison of our consolidated results of operations for the year ended December 31,
2008 with any prior year. In the following results of operations, we provide (i) our consolidated
results of operations for the years ended December 31, 2008, 2007 and 2006, which includes the
results of operations of our businesses (segments) from the date of acquisition and (ii)
comparative historical results of operations for each of our businesses acquired in 2006, on a
stand-alone basis, for each of the years ended December 31, 2008, 2007 and 2006, together with
relevant pro-forma adjustments, and for each of our businesses acquired in 2007 and 2008 for the
years ended December 31, 2008 and 2007, together with relevant pro-forma adjustments.
77
Consolidated Results of Operations Compass Diversified Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
1,538,473 |
|
|
$ |
841,791 |
|
|
$ |
395,173 |
|
Cost of sales |
|
|
1,196,206 |
|
|
|
636,008 |
|
|
|
307,014 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
342,267 |
|
|
|
205,783 |
|
|
|
88,159 |
|
|
Staffing, selling, general and administrative expense |
|
|
268,206 |
|
|
|
150,633 |
|
|
|
65,950 |
|
Management fees |
|
|
15,205 |
|
|
|
10,120 |
|
|
|
4,158 |
|
Supplemental put expense |
|
|
6,382 |
|
|
|
7,400 |
|
|
|
22,456 |
|
Amortization of intangibles |
|
|
24,605 |
|
|
|
12,679 |
|
|
|
5,814 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
27,869 |
|
|
$ |
24,951 |
|
|
$ |
(10,219 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales
On a consolidated basis net sales increased approximately $696.7 million in the year ended December
31, 2008 compared to 2007. The increase is primarily attributable to increased revenues at CBS
Personnel resulting from the acquisition of Staffmark on January 23, 2008 and net sales
attributable to our majority owned subsidiary Fox, also acquired in January 2008 ($131.7 million).
On a consolidated basis net sales increased approximately $446.6 million in the year ended December
31, 2007 compared to 2006. This increase is due to net sales attributable to a full year of
operations of our initial businesses (acquired on May 16, 2006) in 2007 and net sales results
attributable to our 2007 acquisitions ($175.4 million). Refer to the following results of operations
by segment for discussion and a more detailed analysis of net sales by segment.
We do not generate any revenues apart from those generated by the businesses we own. We may
generate interest income on the investment of available funds, but expect such earnings to be
minimal. Our investment in our businesses is typically in the form of loans from the Company to
such businesses, as well as equity interests in those companies. Cash flows coming to the Trust
and the Company are the result of interest payments on those loans, amortization of those loans
and, in the future, potentially, dividends on our equity ownership. However, on a consolidated
basis these items will be eliminated.
Cost of sales
On a consolidated basis cost of sales increased approximately $560.2 million in the year ended
December 31, 2008 compared to 2007 and $329.0 million in the year ended December 31, 2007 compared
to 2006. These increases are due entirely to the corresponding increase in net sales referred to
above. Refer to the following results of operations by segment for a discussion and a more
detailed analysis of cost of sales.
Staffing, selling, general and administrative expense
On a consolidated basis, staffing, selling, general and administrative expense increased
approximately $117.6 million in the year ended December 31, 2008 compared to 2007 and $84.7 million
in the year ended December 31, 2007 compared to 2006. These increases are principally due to those
costs associated with our 2008 acquisitions and 2007 acquisitions. Refer to the following results
of operations by segment for a discussion and a more detailed analysis of staffing, selling,
general and administrative expense. At the corporate level general and administrative costs
increased approximately $2.0 million in 2008 compared to 2007 and $1.6 million in 2007 compared to
2006, in each case as a result of increased salaries and professional fees.
78
Management fees
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5%
(2.0% annualized) of our adjusted net assets, which is defined in the Management Services Agreement
(see Related Party Transactions). For the year ended December 31, 2008, 2007 and 2006 we incurred
approximately $14.7 million, $10.1 million and $4.2 million, respectively, in expense for these
fees. The increase in management fees in 2008 is principally due to the increase in consolidated
adjusted net assets in 2008 as a result of CBS Personnels
acquisition of Staffmark in January 2008 and our acquisition of Fox in January 2008, offset in part
by the sale of Aeroglide and Silvue in June 2008. The increase in management fees in 2007 compared
to 2006 is principally due to incurring the management fee for four quarters in 2007 compared to
only three in 2006, on our initial businesses, and the increase in adjusted net assets as a result
of the 2007 acquisitions, offset in part by the sale of Crosman in January 2007.
In connection with the acquisition of Staffmark in January 2008, CBS Personnel paid approximately
$0.5 million during the year ended December 31, 2008 to a separate manager of Staffmark, unrelated
to CGM.
Supplemental put expense
Concurrent with the 2006 IPO, we entered into a Supplemental Put Agreement with our Manager
pursuant to which our Manager has the right to cause us to purchase the Allocation Interests then
owned by them upon termination of the Management Services Agreement. The Company accrued
approximately $6.4 million, $7.4 million and $22.5 million in expense during the years ended
December 31, 2008, 2007 and 2006, respectively, in connection with this agreement. This expense
represents that portion of the estimated increase in the fair value of our businesses over our
original basis in those businesses that our Manager is entitled to if the Management Services
Agreement were terminated or those businesses were sold (see Related Party Transactions).
Amortization of intangibles
On a consolidated basis, amortization expense of intangible assets increased approximately $11.9
million in the year ended December 31, 2008 compared to 2007 and approximately $6.9 million in the
year ended December 31, 2007 compared to 2006. These increases are due entirely to the recognition
of intangible assets and the attendant amortization directly related to the purchase price
allocations performed for each of our acquisitions, since inception. Refer to the following results
of operations by segment for a discussion and a more detailed analysis of intangible asset
amortization expense.
79
Results of Operations Our Businesses
As previously discussed, we acquired our businesses on various acquisition dates beginning May 16,
2006 (see table above). As a result, our consolidated operating results only include the results
of operations since the acquisition date associated with each of the businesses. The following
discussion reflects a comparison of the historical results of operations for each of our initial
businesses (segments), for the complete fiscal years ending December 31, 2008, 2007 and 2006, as if
we had acquired them on January 1, 2006. In addition, the historical results of operations for CBS
Personnel include the results of Staffmark (acquired on January 21, 2008) as if CBS acquired
Staffmark as of January 1, 2006. For the 2008 acquisitions and 2007 acquisitions the following
discussion reflects comparative historical results of operations for the entire fiscal years ending
December 31, 2008 and 2007 as if we had acquired the businesses on January 1, 2007. When
appropriate, relevant pro-forma adjustments are reflected in the historical operating results.
Adjustments to depreciation and amortization resulting from purchase allocations that were not
pushed down to a business are not included. We believe this presentation enhances the discussion
and provides a more meaningful comparison of operating results. The following operating results
of our businesses are not necessarily indicative of the results to be expected for a full year,
going forward.
Advanced Circuits
Overview
Advanced Circuits is a provider of prototype, quick-turn and volume production PCBs to customers
throughout the United States. Collectively, prototype and quick-turn PCBs represent approximately
66.0% of Advanced Circuits gross revenues. Prototype and quick-turn PCBs typically command higher
margins than volume production PCBs given that customers require high levels of responsiveness,
technical support and timely delivery of prototype and quick-turn PCBs and are willing to pay a
premium for them. Advanced Circuits is able to meet its customers demands by manufacturing custom
PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and
real-time customer service and product tracking 24 hours per day.
While global demand for PCBs has remained strong in recent years, industry wide domestic production
has declined over 50% since 2000. In contrast, Advanced Circuits revenues 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 and anticipates that demand will be impacted less by current
economic conditions than by its longer lead time production business, which is driven more by
consumer purchasing patterns and capital investments by businesses.
We purchased a majority ownership interest in Advanced Circuits on May 16, 2006.
Results of Operations
The table below summarizes the statement of operations for Advanced Circuits for the fiscal years
ending December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
55,449 |
|
|
$ |
52,292 |
|
|
$ |
48,139 |
|
Cost of sales |
|
|
23,781 |
|
|
|
23,139 |
|
|
|
20,098 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
31,668 |
|
|
|
29,153 |
|
|
|
28,041 |
|
Selling, general and administrative expenses |
|
|
10,872 |
|
|
|
8,914 |
|
|
|
12,855 |
|
Management fees |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
Amortization of intangibles |
|
|
2,631 |
|
|
|
2,661 |
|
|
|
2,731 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
17,665 |
|
|
$ |
17,078 |
|
|
$ |
11,955 |
|
|
|
|
|
|
|
|
|
|
|
80
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 was approximately $55.4 million compared to
approximately $52.3 million for the year ended December 31, 2007, an increase of approximately $3.2
million or 6.0%. The increase in net sales was largely due to increased sales in quick-turn and
prototype production PCBs, which increased by approximately $0.8 million and $2.1 million,
respectively. Quick-turn production PCBs represented approximately 34.4% of gross sales for the
year ended December 31, 2008 compared to approximately 33.0% for the fiscal year ended December 31,
2007. Prototype production represented approximately 31.6% of gross sales for the year ended
December 31, 2008 compared to approximately 32.2% for the same period in 2007. Long-lead production
and other sales as a percentage of gross sales increased to approximately 31.7% of gross sales for
the fiscal year 2008 compared to approximately 32.1% for the fiscal 2007, as this segment of the
companys business is typically driven more by economic conditions than either quick-turn or
prototype production.
Cost of sales
Cost of sales for the fiscal year ended December 31, 2008 was approximately $23.8 million compared
to approximately $23.1 million for the year ended December 31, 2007, an increase of approximately
$0.6 million or 2.8%. The increase in cost of sales was largely due to the increase in net sales.
Gross profit as a percent of net sales increased by approximately 1.3% to approximately 57.1% for
the year ended December 31, 2008 compared to approximately 55.8% for the year ended December 31,
2007, largely as a result of increased production efficiencies, due to increased volume, offset in
part by slight increases in raw material costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $2.0 million during the year ended December
31, 2008 compared to the corresponding period in 2007. In 2008 Advanced Circuits incurred non-cash
charges aggregating approximately $1.6 million reflecting loan forgiveness arrangements provided to
Advanced Circuitss senior management associated with CGIs initial acquisition of Advanced
Circuits, compared to $0.3 million in 2007. The 2007 loan forgiveness charge was only $0.3 million
due to an over accrual of the charge in 2006. This non-cash charge will approximate $1.6 million
in future years. The remaining increase of approximately $0.7 million is principally due to
increases in personnel, salaries and wages and associated benefits.
Income from operations
Income from operations for the year ended December 31, 2008 was $17.7 million compared to $17.1
million for the year ended December 31, 2007, an increase of $0.6 million. This increase primarily
was the result of increased net sales and other factors described above.
Fiscal Year Ended December 31, 2007 Compared to Fiscal Year Ended December 31, 2006
Net sales
Net sales for the year ended December 31, 2007 was approximately $52.3 million compared to
approximately $48.1 million for the year ended December 31, 2006, an increase of approximately $4.2
million or 8.6%. The increase in net sales was largely due to increased sales in quick-turn and
prototype production PCBs, which increased by approximately $2.2 million and $0.9 million,
respectively. These sales increases were offset in part by an increase in promotional discounts of
approximately $0.8 million. Quick-turn production PCBs represented approximately 33.0% of gross
sales for the year ended December 31, 2007 as compared to approximately 32.1% for the fiscal year
ended December 31, 2006. Prototype production represented approximately 32.2% of sales for the year
ended December 31, 2007 compared to approximately 33.4% for the same period in 2006. Long-lead
production sales as a percentage of sales increased to approximately 22.3% of sales for the fiscal
year 2007 compared to approximately 20.4% for the fiscal year 2006.
Cost of sales
Cost of sales for the fiscal year ended December 31, 2007 was approximately $23.1 million compared
to approximately $20.1 million for the year ended December 31, 2006, an increase of approximately
$3.0 million or 15.1%. The increase in cost of sales was largely due to the increase in
production. Gross profit as a percent of net sales decreased by approximately 2.5% to
approximately 55.8% for the year ended December 31, 2007 compared to approximately 58.3% for the
year ended December 31, 2006 largely as a result of significant increases in raw material costs,
particularly the commodity items such as glass, copper and gold, as well as temporary
inefficiencies caused as a result of capacity expansion at the Aurora, Colorado facility.
81
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2007 was approximately
$8.9 million compared to approximately $12.9 million for the year ended December 31, 2006, a
decrease of approximately $3.9 million. Approximately $3.5 million of the decrease was due to loan
forgiveness arrangements provided to Advanced Circuits management associated with CGIs
acquisition of Advanced Circuits. In 2006, Advanced Circuits accrued $3.8 million in non-cash
charges associated with this arrangement compared to $0.3 million in 2007. In addition, cost
savings totaling approximately $0.4 million were realized in fiscal 2007 due to decreases in
employee incentive programs.
Income from operations
Income from operations was approximately $17.1 million for the year ended December 31, 2007
compared to approximately $12.0 million for the year ended December 31, 2006, an increase of
approximately $5.1 million or 42.9%. The increase in income from operations was principally due to
the increase in net sales and its associated gross margin and other factors, described above.
American Furniture
Overview
Founded in 1998 and headquartered in Ecru, Mississippi, American Furniture is a leading U.S.
manufacturer of upholstered furniture, focused exclusively on the promotional segment of the
furniture industry. American Furniture offers a broad product line of stationary and motion
furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold
primarily at retail price points ranging between $199 and $999. American Furniture is a low-cost
manufacturer and is able to ship any product in its line within 48 hours of receiving an order
On February, 12, 2008, American Furnitures 1.1 million square foot corporate office and
manufacturing facility in Ecru, MS was partially destroyed in a fire. Approximately 750 thousand
square feet of the facility was impacted by the fire. The executive offices were fundamentally
unaffected. The recliner and motion plant, although largely unaffected, suffered some smoke damage
but resumed operations on February 21, 2008. There were no injuries related to the fire.
The Company temporarily moved its stationary production lines into other facilities. In addition
to its 45 thousand square foot flex facility, management secured 166 thousand square feet of
additional manufacturing and warehouse space in the surrounding Pontotoc area. These temporary
stationary production facilities provided the company with approximately 90% of the pre-fire
stationary production capabilities for the months of April, through November where orders for
stationary products were addressed by these temporary facilities, whereas the orders for motion and
recliner products were addressed by the production facilities that were largely unaffected by the
fire at the Ecru facility. On November 7, 2008 the damaged manufacturing facility was fully
restored and operating.
American Furnitures products are adapted from established designs in the following categories: (i)
motion and recliner; (ii) stationary; (iii) occasional chair and; (iv) accent tables. American
Furnitures products are manufactured from common components and offer proven select fabric
options, providing manufacturing efficiency and resulting in limited design risk or inventory
obsolescence.
82
Results of Operations
The table below summarizes the results of operations for American Furniture for the fiscal year
ending December 31, 2008 and the pro-forma results of operations for the year ended December 31,
2007. We acquired American Furniture on August 31, 2007. The following operating results are
reported as if we acquired American Furniture on January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Pro-forma) |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
130,949 |
|
|
$ |
156,635 |
|
Cost of sales |
|
|
104,540 |
|
|
|
120,739 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
26,409 |
|
|
|
35,896 |
|
Selling, general and administrative expenses (a) |
|
|
17,853 |
|
|
|
20,672 |
|
Management fees |
|
|
500 |
|
|
|
500 |
|
Amortization of intangibles (b) |
|
|
2,933 |
|
|
|
2,933 |
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
5,123 |
|
|
$ |
11,791 |
|
|
|
|
|
|
|
|
Prior period results of operations of American Furniture for the year ended December 31, 2007
include the following pro-forma adjustments:
|
|
|
(a) |
|
Selling, general and administrative expenses were reduced by $2.8 million, representing
one-time transaction costs incurred by the seller. |
|
(a) |
|
A reduction in depreciation expense of $0.1 million as a result of, and derived from, the
purchase price allocation in connection with our acquisition of American Furniture in August 2007. |
|
(b) |
|
A reduction in charges to amortization of intangible assets totaling $0.7 million, as a result
of, and derived from, the purchase price allocation in connection with our acquisition of American
Furniture in August 2007. |
Fiscal Year Ended December 31, 2008 Compared to Pro-forma Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 were $130.9 million compared to $156.6 million for
the same period in 2007, a decrease of $25.7 million or 16.4%. Stationary product sales decreased
approximately $19.0 million for the year ended December 31, 2008 compared to the same period in
2007. Motion and Recliner product sales decreased approximately $5.8 million, while Table and
Occasional sales decreased $0.3 million for the year ended December 31, 2008 compared to the same
period in 2007. These decreases in sales are due principally to the fire that destroyed the
finished goods warehouse and a large part of the manufacturing facility in February 2008.
Management believes that the softer economy in 2008 is also responsible, although to a lesser
extent, for the decrease in sales volume. We expect sales to continue to decline in 2009 as new
housing starts continue to decline significantly and consumers continue to be faced with general
economic uncertainty fueled by deteriorating consumer credit markets and lagging consumer
confidence as a result of volatile and often erratic financial markets. All of these factors have
significantly impacted big ticket consumer purchases such as furniture.
Cost of sales
Cost of sales decreased approximately $16.2 million for the year ended December 31, 2008 compared
to the same period of 2007 and is due principally to the corresponding decrease in sales. Gross
profit as a percent of sales was 20.2% for the year ended December 31, 2008 compared to 22.9% in
the corresponding period in 2007. This decrease in margin is attributable to raw material price
increases in 2008, particularly foam and steel, and to a lesser extent labor inefficiencies
incurred in the manufacturing recovery process due to multiple temporary production facilities
being utilized for much of the year and associated overtime costs incurred, resulting from the fire
in February 2008. As of November 7, 2008, we have rebuilt our primary production facility destroyed
in the fire, and as such do not expect to incur additional labor inefficiency costs in the future.
Recently, raw material prices for foam and steel have begun to decline. If this decline continues
we may realize lower raw material costs as a percent of total cost of sales in 2009.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008 decreased
approximately $2.8 million over the corresponding period in 2007. This decrease is primarily due to
the business interruption insurance proceeds recorded during the period of approximately $3.1
million. Also contributing to the decrease was a reduction of $0.5 million in commissions paid and
$0.4 million in insurance expense during the period due to significant reduction in net sales
caused by the fire. These decreases were offset in part by increases in fuel costs of $0.5 million
and increases in property taxes and legal costs of $0.7 million during the year ended December 31,
2008 compared to 2007.
83
Income from operations
Income from operations decreased approximately $6.7 million for the year ended December 31, 2008
over the corresponding period in 2007, primarily due to the decrease in net sales, related gross
profit margins and other factors as described above.
Anodyne
Overview
Anodyne, headquartered in Coral Springs, Florida is a specialty designer, manufacturer and
distributor of medical devices, specifically support surfaces and patient positioning devices and
was formed in February 2006 to purchase the assets and operations of AMF Support Surfaces, Inc
(AMF) and SenTech Medical Systems, Inc. (SenTech) on February 15, 2006. On October 5, 2006,
Anodyne purchased a third manufacturer and distributor of patient positioning devices, Anatomic
Concepts, Inc. (Anatomic). Anatomic operations were merged into the AMF operations. On June 27,
2007 Anodyne purchased PrimaTech Medical Systems, Inc. (PrimaTech), a distributor of medical
support surfaces focusing on the lower price point long-term and home care markets.
The medical support surfaces industry is fragmented and comprised of many small participants and
niche manufacturers. Anodynes consolidation platform marks the first opportunity for customers to
source all leading support surface technologies for the acute care, long term care and home health
care from a single source. Anodyne is a vertically integrated company with engineering, design and
research, manufacturing and support performed in house to quickly bring new products to market and
maintain strict quality standards.
Anodynes strategy for approaching this market includes offering its customers consistently high
quality, FDA compliant products on a national basis, leveraging its scale to provide industry
leading research and development while pursuing cost savings through purchasing scale and
operational efficiencies. Anodyne began operations on February 15, 2006 and as such, the following
comparative results of operation reflect only ten and one-half months of operations in fiscal 2006.
We purchased Anodyne from CGI on July 31, 2006.
Results of Operations
The table below summarizes the results of operations for Anodyne for the fiscal years ending
December 31, 2008 and 2007 and the pro-forma results of operations for the period ended December
31, 2006. We acquired Anodyne on July 31, 2006. The following results of operations are reported
as if we acquired Anodyne on February 15, 2006 (its inception).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Pro-forma) |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
54,199 |
|
|
$ |
44,189 |
|
|
$ |
23,367 |
|
Cost of sales |
|
|
40,683 |
|
|
|
33,073 |
|
|
|
17,505 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,516 |
|
|
|
11,116 |
|
|
|
5,862 |
|
Selling, general and administrative expenses (a) |
|
|
7,455 |
|
|
|
6,502 |
|
|
|
4,596 |
|
Management fees |
|
|
350 |
|
|
|
350 |
|
|
|
305 |
|
Amortization of intangibles |
|
|
1,483 |
|
|
|
1,328 |
|
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
4,228 |
|
|
$ |
2,936 |
|
|
$ |
252 |
|
|
|
|
|
|
|
|
|
|
|
Prior period results of operations of Anodyne for the year ended December 31, 2006 include the
following pro-forma adjustment:
|
|
|
(a) |
|
Selling, general and administrative expenses were reduced by $1.0 million in 2006, representing
an adjustment for one-time transaction costs incurred by the seller as a result of our purchase. |
84
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 were approximately $54.2 million compared to
approximately $44.2 million for the same period in 2007, an increase of $10.0 million or 22.7%.
Sales reflecting new product introductions to new customers, year over year growth to existing
customers and price increases totaled approximately $9.0 million. Sales associated with PrimaTech,
which was purchased in June 2007, accounted for $1.0 million of this increase. During the fourth
quarter of 2008, the general economic slowdown in the United States showed significant signs of
contraction in health care capital budgets. We expect this trend to continue through fiscal 2009
which may have a negative impact over the purchasing of support surfaces and patent positioning
devices.
Cost of sales
Cost of sales increased approximately $7.6 million for the year ended December 31, 2008 compared to
the same period in 2007 and is principally due to the corresponding increases in sales, raw
material costs and manufacturing infrastructure costs. Gross profit as a percent of sales decreased
slightly to approximately 24.9% for the year ended December 31, 2008 compared to 25.2% in the same
period of 2007. This decrease is due to increases in manufacturing infrastructure costs, raw
materials and the timing between cost increases and sales price increases. Raw materials,
particularly polyurethane foam and fabric generally represent approximately 50% of cost of sales.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008 increased
approximately $1.0 million compared to the same period in 2007. This increase is largely the result
of increased costs associated with the acquisition of PrimaTech totaling $0.4 million and $0.7
million of increased costs related to administrative staff and associated costs necessary to
support the increase in sales, and new product development. These increases were offset in part by
a reduction in costs totaling $0.1 million, attributable to Hollywood Capital, a former management
group that was comprised of the former CEO and CFO. The Hollywood Capital management services
agreement was terminated in October 2008. We expect annual savings of approximately $0.7 million
going forward as a result of terminating the Hollywood Capital arrangement.
Amortization expense
Amortization expense increased approximately $0.2 million in the year ended December 31, 2008
compared to the corresponding period in 2007, due principally to the full year impact of
amortization in fiscal 2008 in connection with the intangible assets realized as part of the add-on
acquisition of PrimaTech in June 2007.
Income from operations
Income from operations increased approximately $1.3 million to $4.2 million for the year ended
December 31, 2008 compared to the same period in 2007, principally as a result of the significant
increase in net sales offset in part by higher infrastructure costs necessary to support the
increase in sales volume and other factors described above.
Fiscal Year Ended December 31, 2007 Compared to Pro-forma Fiscal Year Ended December 31, 2006
Net sales
Net sales for the year ended December 31, 2007 were $44.2 million compared to $23.4 million for the
same period in 2006, an increase of $20.8 million, or 89.1%. Sales associated with Anatomic,
which was purchased in October 2006, accounted for $9.1 million of this increase and sales
associated with PrimaTech, purchased in June 2007 accounted for approximately $2.6 million of this
increase. Sales reflecting new product introductions to new customers and year over year growth to
existing customers totaled approximately $5.9 million. The remaining increase in net sales is a
function of twelve months of activity in 2007 compared to ten and one-half months of activity in
2006.
Cost of sales
Cost of sales increased approximately $15.6 million for the year ended December 31, 2007 compared
to the same period in 2006 and is principally due to the corresponding increase in sales and
manufacturing infrastructure costs. Gross profit as a percent of sales remained relatively
constant for the year ended December 31, 2007 compared to 2006.
85
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2007 increased $1.9
million compared to the same period in 2006. This increase is largely the result of increases in
administrative staff and associated costs necessary to support the increase in sales and new
product development.
Amortization expense
Amortization expense increased approximately $0.6 million in the year ended December 31, 2007
compared to the corresponding period in 2006, due principally to the full year impact of
amortization in fiscal 2007, and the effect of amortization expense resulting from the acquisition
of Anatomic in October 2006 and PrimaTech in June 2007.
Income from operations
Income from operations increased approximately $2.7 million to $2.9 million for the year ended
December 31, 2007 compared to the same period in 2006, principally as a result of the significant
increase in net sales offset in part by higher infrastructure costs necessary to support the
increase in sales volume and other factors described above.
CBS Personnel
Overview
CBS Personnel, a provider of temporary staffing services in the United States, provides a wide
range of human resource services, including temporary staffing services, employee leasing services,
and permanent staffing and temporary-to-permanent placement services. CBS Personnel serves over
6,500 corporate and small business clients and during an average week places over 38,000 employees
in a broad range of industries, including manufacturing, transportation, retail, distribution,
warehousing, automotive supply, construction, industrial, healthcare and financial sectors.
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 new markets through acquisition. In keeping with these strategies, on
January 21, 2008, CBS Personnel acquired Staffmark Investment LLC and its subsidiaries. This
acquisition gave CBS Personnel a presence in Arkansas, Tennessee, Colorado, Oklahoma, and Arizona,
while significantly increasing its presence in California, Texas, the Carolinas, New York and the
New England area. While no specific acquisitions are currently contemplated at this time, CBS
Personnel continues to view acquisitions as an attractive means to enter new geographic markets.
Fiscal 2008 was a very difficult year for the temporary staffing industry. The already-weak
economic conditions and employment trends in the U.S., present at the start of 2008, continued to
worsen as the year progressed. The most notable deterioration occurred in the fourth quarter of
2008 as the economic slowdown became more evident.
According to the U.S. Bureau of Labor Statistics, during 2008, the U.S. economy lost 2.6 million
jobs, compared with 2.1 million jobs created in 2006 and 1.1 million in 2007. Temporary staffing
was impacted especially hard, posting 21 consecutive months of year-over-year declines. In fact,
the rate of temporary job losses accelerated throughout the year, with the December 2008 drop being
the highest in this cycle resulting in almost immediate deterioration of employment markets and
temporary staffing.
On February 27, 2009, CBS Personnel rebranded its businesses under the Staffmark brand. In
connection with this rebrand, the CBS trade name of $10.6 million, which is reflected as an
indefinite lived intangible asset at December 31, 2008, will be adjusted to its estimated fair
value and converted to a finite lived asset, subject to amortization, beginning in the first
quarter of 2009.
86
Results of Operations
The table below summarizes the pro-forma income from operations for CBS Personnel for each of the
fiscal years ended December 31, 2008, 2007 and 2006 prepared as if Staffmark and CBS were acquired
on January 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
(Pro-forma) |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Service revenues |
|
$ |
1,037,418 |
|
|
$ |
1,153,144 |
|
|
$ |
1,175,255 |
|
Cost of services |
|
|
859,026 |
|
|
|
951,272 |
|
|
|
968,632 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
178,392 |
|
|
|
201,872 |
|
|
|
206,623 |
|
Staffing, selling, general and administrative expenses (a) |
|
|
155,453 |
|
|
|
163,193 |
|
|
|
162,308 |
|
Management fees (b) |
|
|
1,761 |
|
|
|
1,930 |
|
|
|
1,977 |
|
Amortization of intangibles (c)(d) |
|
|
5,082 |
|
|
|
5,155 |
|
|
|
5,116 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
16,096 |
|
|
$ |
31,594 |
|
|
$ |
37,222 |
|
|
|
|
|
|
|
|
|
|
|
Combined results of operations of CBS Personnel and Staffmark for the years ended December 31,
2008, 2007 and 2006 include the following pro-forma adjustments:
|
|
|
(a) |
|
A decrease in staffing, selling, general and administrative expenses in 2006 totaling $0.3
million, which reflects transaction costs incurred by CBS Personnel as a result of, and derived
from, our acquisition of CBS Personnel in May 2006. |
|
(b) |
|
An increase in management fees totaling $0.9 million in 2007 and 2006 reflecting quarterly fees
that would have been due to our Manager in connection with our Management Services Agreement based
on the incremental Staffmark net revenues |
|
(c) |
|
An increase in amortization of intangible assets totaling $0.3 million, $4.0 million and $4.0
million in 2008, 2007 and 2006, respectively, reflecting increased amortization expense as a result
of, and derived from, the purchase price allocation in connection with CBS Personnels acquisition
of Staffmark in January 2008. |
|
(d) |
|
A decrease in amortization of intangible assets in 2006 totaling $1.6 million reflecting an
adjustment for deferred loan origination fees, the balance of which was written off as a result of
our acquisition of CBS Personnel in May 2006. |
Pro-forma Fiscal Year Ended December 31, 2008 compared to Pro-forma Fiscal Year Ended December 31, 2007
Service revenues
Revenues for the year ended December 31, 2008 decreased approximately $115.7 million, or 10.0%,
compared to the same period in 2007. The reduction in revenues reflects reduced demand for
temporary staffing services (primarily clerical and light industrial) as a result of the downturn
in the economy. Approximately $3.2 million of the decrease is related to reduced revenues for
permanent staffing services as clients were affected by weaker economic conditions. Until we
witness sustained temporary staffing job creation and signs of a strengthening global economy, we
expect to continue to experience revenue declines, through fiscal 2009.
Cost of services
Cost of services for the year ended December 31, 2008 decreased approximately $92.2 million
compared to the same period in 2007. This decrease is principally the direct result of the
decrease in service revenues. Gross margin was approximately 17.2% and 17.5% of revenues for the
years ended December 31, 2008 and December 31, 2007, respectively. The decrease in margins is
primarily the result of reduced permanent staffing services, which carries a higher profit margin.
Staffing, selling, general and administrative expenses
Staffing, selling, general and administrative expenses for the year ended December 31, 2008
decreased approximately $7.7 million compared to the same period in 2007. Comparative year over
year staffing, selling, general and administrative costs decreased approximately $15.1 million
principally due to achievement of synergies from the Staffmark acquisition and cost reduction
efforts in response to the economic downturn. This decrease was offset by approximately $7.4
million in one-time integration costs associated with the integration of the Staffmark operations
during 2008. We have taken measures beginning in the fourth quarter of 2008 to reduce overhead
costs, consolidate facilities and close unprofitable branches in order to mitigate the negative
impact of the current economic environment. This cost reduction program will continue through
fiscal 2009. These cost savings will be offset in part by additional Staffmark integration and
one-time costs of approximately $1.3 million in 2009
87
Management fees
Management fees are based on a formula of net revenues. The decrease in management fees in 2008
compared to 2007 is a direct result of the decrease in revenues in 2008 compared to 2007. The
decrease was offset by an additional $0.5 million paid to a separate manager of Staffmark,
unrelated to CGM.
Income from operations
The weakened economy significantly affected our operating results in fiscal 2008. For the year
ended December 31, 2008, income from operations decreased approximately $15.5 million to
approximately $16.1 million compared to the same period in 2007. Based on the impact that the
current economic deterioration has had and will continue to have on the employment markets and
temporary staffing industry, and other factors described above, we expect income from operations to
decline significantly in 2009.
Pro-forma Fiscal Year Ended December 31, 2007 Compared to Pro-forma Fiscal Year Ended December 31, 2006
Service revenues
Revenues for the year ended December 31, 2007 decreased approximately $22.1 million, or 1.9%, over
the corresponding period in 2006. Severe winter storms affected many clients, curtailing their
operations. The remaining reduction reflects reduced demand for staffing services (primarily
clerical and light industrial) as clients were affected by weaker economic conditions.
Cost of services
Cost of services for the year ended December 31, 2007 decreased approximately $17.4 million, or
1.8%, from the same period a year ago as a result of reduced demand for staffing services. Gross
margin was approximately 17.5% and 17.6% of revenues for the year ended December 31, 2007 and 2006,
respectively. This slight decrease is primarily the result of higher workers compensation
expenses.
Staffing, selling, general and administrative expenses
Staffing, selling, general and administrative expenses for the year ended December 31, 2007
increased approximately $0.9 million when compared to the same period in 2007. This increase is
primarily related to higher staff compensation costs in 2007.
Income from operations
Income from operations decreased approximately $5.6 million for the year ended December 31, 2007
compared to the same period in 2006 based on the factors described above.
Fox
Overview
Fox, headquartered in Watsonville, California, is a branded action sports company that designs,
manufactures and markets high-performance suspension products for mountain bikes, snowmobiles,
motorcycles, all-terrain vehicles ATVs, and other off-road vehicles.
Foxs products are recognized by manufacturers and consumers as being among the most technically
advanced suspension products currently available in the marketplace. Foxs technical success is
demonstrated by its dominance of award winning performances by professional athletes across its
suspension products. As a result, Foxs suspension components are incorporated by OEM customers on
their high-performance models at the top of their product lines. OEMs capitalize on the strength of
Foxs brand to maintain and expand their own sales and margins. In the Aftermarket segment,
customers seeking higher performance select Foxs suspension components to enhance their existing
equipment.
We purchased a controlling interest in Fox on January 4, 2008. Fox sells to more than 134 OEM and
6,875 Aftermarket customers across its market segments. In each of the years 2008 and 2007,
approximately 76% and 75% of net sales were to OEM customers. The remainder was to Aftermarket
customers.
88
Results of Operations
The table below summarizes the results of operations for Fox for the fiscal year ending December
31, 2008 and the pro-forma results of operations for the year ended December 31, 2007. The
following operating results are reported as if we acquired Fox on January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Pro-forma) |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
131,734 |
|
|
$ |
105,726 |
|
Cost of sales (a) |
|
|
95,844 |
|
|
|
81,765 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
35,890 |
|
|
|
23,961 |
|
Selling, general and administrative expenses (b) |
|
|
19,182 |
|
|
|
15,818 |
|
Management fees (c ) |
|
|
500 |
|
|
|
500 |
|
Amortization of intangibles (d) |
|
|
5,501 |
|
|
|
5,233 |
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
10,707 |
|
|
$ |
2,410 |
|
|
|
|
|
|
|
|
Prior period results of operations of Fox for the year ended December 31, 2007 include the
following pro-forma adjustments:
|
|
|
(a) |
|
An increase in cost of sales totaling $0.3 million, reflecting additional depreciation expense
as a result of, and derived from, the purchase price allocation in connection with our acquisition
of Fox in January 2008. |
|
(b) |
|
An increase in selling, general and administrative expense totaling $0.1 million reflecting
additional depreciation expense as a result of, and derived from, the purchase price allocation in
connection with our acquisition of Fox in January 2008. |
|
(c) |
|
An increase in management fees totaling $0.5 million reflecting quarterly fees that would have
been due to our Manager in connection with our Management Services Agreement. |
|
(d) |
|
An increase in amortization of intangible assets totaling $5.2 million reflecting amortization
expense as a result of, and derived from, the purchase price allocation in connection with our
acquisition of Fox in January 2008. |
Fiscal Year Ended December 31, 2008 Compared to Pro-forma Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 increased $26.0 million, or 24.6%, over the
corresponding period in 2007. Sales growth was driven largely by OEM sales in mountain biking and
power sports which totaled approximately $100.3 million for the year ended December 31, 2008
compared to $79.0 million in the same period of 2007. This represents an increase of $21.3
million, or 27.0%. Aftermarket sales totaled approximately $31.4 million in 2008 compared to $26.7
million in 2007, an increase of $4.7 million, or 17.6%. These OEM and Aftermarket sales increases
are principally the result of well received new model year products, particularly in mountain
biking. International OEM and After market sales were $92.5 million in 2008 compared to $70.5
million in 2007 an increase of $22.0 million or 31.2%. In addition, there was a temporary plant
shutdown in fiscal 2007 which also contributed, although to a much lesser extent, to the increase
in 2008 sales compared to 2007.
Cost of sales
Cost of sales for the year ended December 31, 2008 increased approximately $14.1 million, or 17.2%,
over the corresponding period in 2007. The increase in cost of sales is primarily attributable to
the increase in net sales for the same period. Gross profit as a percentage of sales increased to
27.2% at December 31, 2008 from 22.7% at December 31, 2007, largely due to improved manufacturing
efficiencies associated with the overall increase in sales and lower freight costs as supply chain
improvements reduced the necessity to air ship product, offset in part by increased raw material
costs.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008 increased $3.4
million over the corresponding period in 2007. This increase is the result of increases in
administrative, engineering, sales and marketing costs to drive and support the significant sales
growth. Marketing costs increased $1.6 million and research and development costs increased $0.6
million in 2008 compared to 2007.
89
Income from operations
Income from operations for the year ended December 31, 2008 increased approximately $8.3 million
over the corresponding period in 2007 based principally on the significant increase in sales and
related gross profit and other factors, described above.
HALO
Overview
Operating under the brand names of HALO and Lee Wayne, headquartered in Sterling, IL, HALO is an
independent provider of customized drop-ship promotional products in the U.S. Through an extensive
group of dedicated sales professionals, HALO serves as a one-stop shop for over 40,000 customers
throughout the U.S. HALO is involved in the design, sourcing, management and fulfillment of
promotional products across several product categories, including apparel, calendars, writing
instruments, drink ware and office accessories. HALOs sales professionals work with customers and
vendors to develop the most effective means of communicating a logo or marketing message to a
target audience. Approximately 95% of products sold are drop shipped, resulting in minimal
inventory risk. HALO has established itself as a leader in the promotional products and marketing
industry through its focus on service through its approximately 700 account executives.
HALO acquired Goldman Promotions, a promotional products distributor, in April 2008, and the
promotional products distributor division of Eskco, Inc., in November 2008.
Distribution of promotional products is seasonal. Typically, HALO expects to realize approximately
45% of its sales and 70% of its operating income in the months of September through December, due
principally to calendar sales and corporate holiday promotions.
Results of Operations
The table below summarizes the results of operations for HALO for the fiscal year ending December
31, 2008 and the pro-forma results of operations for the year ended December 31, 2007. We acquired
HALO on February 28, 2007. The following operating results are reported as if we acquired HALO on
January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Pro-forma) |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
159,797 |
|
|
$ |
144,342 |
|
Cost of sales |
|
|
98,845 |
|
|
|
88,939 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
60,952 |
|
|
|
55,403 |
|
Selling, general and administrative expenses (a) |
|
|
52,806 |
|
|
|
47,069 |
|
Management fees (b) |
|
|
500 |
|
|
|
500 |
|
Amortization of intangibles (c) |
|
|
2,357 |
|
|
|
2,110 |
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
5,289 |
|
|
$ |
5,724 |
|
|
|
|
|
|
|
|
Prior period results of operations of HALO for the year ended December 31, 2007 includes the
following pro-forma adjustments:
|
|
|
(a) |
|
An increase in selling, general and administrative expense totaling $0.3 million
reflecting additional depreciation expense as a result of, and derived from, the purchase price
allocation in connection with our acquisition of HALO in February 2007. |
|
(b) |
|
An increase in management fees totaling $0.1 million, reflecting additional quarterly fees that
would have been due to our Manager in connection with our Management Services Agreement. |
|
(c) |
|
An increase in amortization of intangible assets totaling $0.3 million reflecting
additional amortization expense as a result of, and derived from, the purchase price allocation
in connection with our acquisition of HALO in February 2007. |
90
Fiscal Year Ended December 31, 2008 Compared to Pro-forma Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 were $159.8 million, compared to $144.3 million for
the same period in 2007, an increase of $15.5 million or 10.7%. Sales increases to accounts from
acquisitions made in 2008 and 2007 accounted for approximately $22.8 million of increased sales
offset by a decrease in sales to existing customers totaling approximately $7.3 million. This
decrease in sales to existing customers is attributable to decreases in sales order volume as
customers have cut back on merchandising expenditures in response to the economic slowdown and
worsening global economic conditions. We expect that current unfavorable economic conditions will
continue and may result in lower volume orders from existing customers in 2009 as advertising
budgets are continuing to be pared in response to the current economic climate.
Cost of sales
Cost of sales for the year ended December 31, 2008 increased approximately $9.9 million compared to
the same period in 2007. The increase in cost of sales is primarily attributable to the increase
in net sales for the same period. Gross profit as a percentage of net sales totaled approximately
38.1% and 38.4% of net sales in each of the years ended December 31, 2008 and 2007, respectively.
The slight decrease in gross profit as a percent of sales is due to unfavorable product mix.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008, increased
approximately $5.7 million compared to the same period in 2007. This increase is largely the result
of increased direct commission expense attributable to the increase in net sales, totaling
approximately $2.5 million, increased administrative and personnel costs incurred as a result of
the increase in the number of independent sales representatives in 2007, totaling $2.5 million, and
one-time integration costs of our 2008 acquisitions, totaling approximately $0.9 million. In
response to the severe economic slowdown, HALO plans to reduce overhead costs in 2009 and curtail
discretionary spending by approximately $2.0 million in order to more appropriately align its cost
structure with anticipated reductions in net sales.
Amortization expense
Amortization expense for the year ended December 31, 2008 increased approximately $0.2 million
compared to the same period in 2007. This increase is to due principally the amortization expense
of intangible assets recognized in connection with the two acquisitions in 2008.
Income from operations
Income from operations decreased approximately $0.4 million for the year ended December 31, 2008
compared to the same period in 2007 due principally to the decrease in sales to existing customers
and the increase in integration costs and other administrative costs associated with the
acquisitions made in 2008, offset in part by the increase in gross profit contributions from sales
associated with the acquisitions.
Liquidity and Capital Resources
At December 31, 2008, on a consolidated basis, cash flows provided by operating activities totaled
approximately $40.5 million, which reflects the results of operations of six of our businesses for
year ended December 31, 2008 and the results of operations of our 2008 dispositions for
approximately six months. Significant non-cash charges reflected in operating cash flow includes:
(i) depreciation and amortization charges totaling $35.0 million; (ii) supplemental put expense
totaling $6.4 million and (iii) minority interest in net income totaling $4.0 million.
Cash flows used in investing activities totaled approximately $22.5 million, which reflects the
costs to acquire Fox, and Staffmark of approximately $157.2 million, the costs associated with
additional add-on acquisitions at the segment level totaling approximately $10.3 million and
capital expenditures of approximately $11.6 million offset in part by the net proceeds received
from the sale of Aeroglide and Silvue totaling approximately $154.2 million.
Cash flows used in financing activities totaled approximately $39.8 million, principally reflecting
distributions paid to shareholders during the year totaling $41.5 million offset in part by net
borrowings on our Credit Facility totaling $2.5 million.
91
At December 31, 2008 we had approximately $97.5 million of cash and cash equivalents on hand and
the following outstanding loans due from each of our businesses:
|
|
|
Advanced Circuits approximately $60.1 million; |
|
|
|
|
American Furniture approximately $70.8 million; |
|
|
|
|
Anodyne approximately $18.8 million; |
|
|
|
|
CBS Personnel approximately $110.6 million; |
|
|
|
|
Fox approximately $50.1 million; and |
|
|
|
|
HALO approximately $51.6 million. |
Each loan has a scheduled maturity and each business is entitled to repay all or a portion of the
principal amount of the outstanding loans, without penalty, prior to maturity. At December 31,
2008, all of our businesses were in compliance with their financial covenants with us.
Our primary source of cash is from the receipt of interest and principal on our outstanding loans
to our businesses. Accordingly, we are dependent upon the earnings and cash flow of these
businesses, which are available for (i) operating expenses; (ii) payment of principal and interest
under our Credit Agreement,; (iii) payments to CGM due or potentially due pursuant to the
Management Services Agreement, the LLC Agreement, and the Supplemental Put Agreement; (iv) cash
distributions to our shareholders and (v) investments in future acquisitions. Payments made under
(iii) above are required to be paid before distributions to shareholders and may be significant and
exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such
expenditures. A non-cash charge to earnings of approximately $7.4 million was recorded during the
year ended December 31, 2007 in order to recognize our estimated, potential liability in connection
with the Supplemental Put Agreement between us and CGM. Approximately $14.9 million of the accrued
profit allocation was paid in the third quarter of fiscal 2008 in connection with the sale of
Aeroglide and Silvue. A liability of approximately $13.4 million is reflected in our consolidated
balance sheet, which represents our estimated liability for this obligation at December 31, 2008.
We believe that we currently have sufficient liquidity and capital resources, which include our amounts available
under the Revolving Credit Facility, to meet our existing obligations, including quarterly distributions to
our shareholders, as approved by our Board of Directors, over the next twelve months.
On December 7, 2007 we amended our existing $250 million credit facility with a group of lenders
led by Madison Capital, LLC. The Credit Agreement provides for a Revolving Credit Facility
totaling $340 million which matures in November 2012 and a Term Loan Facility totaling $153
million. The Term Loan Facility requires quarterly payments of $0.5 million that commenced March
31, 2008 with a final payment of the outstanding principal balance due on December 7, 2013. The
Revolving Credit Facility matures on December 7, 2012. The Credit Agreement permits the Company to
increase, over the next two years, the amount available under the Revolving Credit Facility by up
to $10 million and the Term Loan Facility by up to $145 million, subject to certain restrictions
and Lender approval.
The Revolving Credit Facility allows for loans at either base rate or LIBOR. Base rate loans bear
interest at a fluctuating rate per annum equal to the greater of (i) the prime rate of interest
published by the Wall Street Journal and (ii) the sum of the Federal Funds Rate plus 0.5% for the
relevant period, plus a margin ranging from 1.50% to 2.50% based upon the ratio of total debt to
adjusted consolidated earnings before interest expense, tax expense, and depreciation and
amortization expenses for such period (the Total Debt to EBITDA Ratio). LIBOR loans bear
interest at a fluctuating rate per annum equal to the London Interbank Offer Rate, or LIBOR, for
the relevant period plus a margin ranging from 2.50% to 3.50% based on the Total Debt to EBITDA
Ratio We are required to pay commitment fees ranging between 0.75% and 1.25% per annum on the
unused portion of the Revolving Credit Facility. At December 31, 2008 we had no borrowings
outstanding under our Revolving Credit Facility and $289.3 million available.
The Term Loan Facility bears interest at either base rate or LIBOR. Base rate loans bear interest
at a fluctuating rate per annum equal to the greater of (i) the prime rate of interest published by
the Wall Street Journal and (ii) the sum of the Federal Funds Rate plus 0.5% for the relevant
period plus a margin of 3.0%. LIBOR loans bear interest at a fluctuating rate per annum equal to
the London Interbank Offer Rate, or LIBOR, for the relevant period plus a margin of 4.0%.
On January 22, 2008 we entered into a three-year interest rate swap agreement with our bank
lenders, fixing the rate of $140 million at 7.35% on a like amount of variable rate Term Loan
Facility borrowings. The interest rate swap is intended to mitigate the impact of fluctuations in
interest rates and effectively converts $140 million of our floating-rate Term Loan Facility to a
fixed rate basis for a period of three years.
92
On February 18, 2009, we repaid $75.0 million of our outstanding Term Loan Facility. The balance
of our Term Loan Facility subsequent to the repayment was $78.0 million.
On February 18, 2009, we terminated $70.0 million of our outstanding interest rate swap in
connection with the repayment of the Term Loan Facility. Termination fees totaled $2.5 million,
which represented the fair value of the swap as of February 18, 2009.
Our Term Loan Facility received a B1 rating from Moodys Investors Service (Moodys), and a BB-
rating from Standard and Poors Rating Services and our Revolving Credit Facility received a Ba1
rating from Moodys, reflective of our strong cash flow relative to debt, and industry
diversification of our businesses.
We intend to use the availability under our Credit Agreement to pursue acquisitions of additional
businesses to the extent permitted under our Credit Agreement and to provide for working capital needs.
93
The table below details cash receipts and payments that are not reflected on our income statement
in order to provide an additional measure of managements estimate of cash flow available for
distribution (CAD). CAD is a non-GAAP measure that we believe provides additional information to
our shareholders in order to enable them to evaluate our ability to make anticipated quarterly
distributions. It is not necessarily comparable with similar measures provided by other entities.
We believe that our historic and future CAD, together with our cash balances and access to cash via
our debt facilities, will be sufficient to meet our anticipated distributions over the next twelve
months. The table below reconciles CAD to net income and to cash flow provided by operating
activities, which we consider to be the most directly comparable financial measure calculated and
presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
78,294 |
|
|
$ |
40,368 |
|
Adjustment
to reconcile net income to cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
35,021 |
|
|
|
24,107 |
|
Supplemental put expense |
|
|
6,382 |
|
|
|
7,400 |
|
Minority shareholders notes and charges |
|
|
2,827 |
|
|
|
1,080 |
|
Minority interest |
|
|
4,042 |
|
|
|
11,940 |
|
Deferred taxes |
|
|
(8,911 |
) |
|
|
(1,295 |
) |
Gain on sales of businesses |
|
|
(73,363 |
) |
|
|
(35,834 |
) |
Amortization of debt issuance cost |
|
|
1,969 |
|
|
|
1,224 |
|
Other |
|
|
381 |
|
|
|
86 |
|
Changes in operating assets and liabilities |
|
|
(6,093 |
) |
|
|
(7,304 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
40,549 |
|
|
|
41,772 |
|
Plus: |
|
|
|
|
|
|
|
|
Unused fee on Revolving Credit Facility (1) |
|
|
3,139 |
|
|
|
2,665 |
|
Staffmark integration and restructuring |
|
|
8,826 |
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
6,093 |
|
|
|
7,304 |
|
Less: |
|
|
|
|
|
|
|
|
Maintenance capital expenditures (2) |
|
|
|
|
|
|
|
|
Advanced Circuits |
|
|
983 |
|
|
|
396 |
|
Aeroglide |
|
|
210 |
|
|
|
420 |
|
American Furniture |
|
|
1,438 |
|
|
|
140 |
|
Anodyne |
|
|
1,425 |
|
|
|
1,521 |
|
Fox |
|
|
1,601 |
|
|
|
|
|
CBS Personnel |
|
|
1,589 |
|
|
|
2,148 |
|
HALO |
|
|
795 |
|
|
|
326 |
|
Silvue |
|
|
|
|
|
|
455 |
|
|
|
|
|
|
|
|
Estimated cash flow available for distribution |
|
$ |
50,566 |
|
|
$ |
46,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution paid April |
|
$ |
(10,246 |
) |
|
$ |
(6,135 |
) |
Distribution paid July |
|
|
(10,246 |
) |
|
|
(9,458 |
) |
Distribution paid October |
|
|
(10,718 |
) |
|
|
(10,246 |
) |
Distribution paid January |
|
|
(10,718 |
) |
|
|
(10,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions |
|
$ |
(41,928 |
) |
|
$ |
(36,085 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the commitment fee on the unused portion of our Revolving Credit
Facility. |
|
(2) |
|
Represents maintenance capital expenditures that were funded from operating cash
flow and excludes approximately $3.5 million and $3.3 million of growth capital
expenditures for the year ended December 31, 2008 and 2007, respectively. |
94
Cash flows of certain of our businesses are seasonal in nature. Cash flows from American Furniture
are typically highest in the months of March through June of each year, coinciding with homeowners
tax refunds. 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 highest in the months of September
through December of each year primarily as the result of calendar sales and holiday promotions.
HALO generates approximately two-thirds of its operating income in the months of September through
December
Related Party Transactions and Certain Transactions Involving our Businesses
We have entered into the following related party transactions with our Manager, CGM:
|
|
|
Management Services Agreement |
|
|
|
|
LLC Agreement |
|
|
|
|
Supplemental Put Agreement |
|
|
|
|
Cost Reimbursement and Fees |
Management
Services Agreement We entered into a management services agreement
(Management Services Agreement) with CGM effective May 16, 2006. The Management Services
Agreement provides for, among other things, CGM to perform services for us in exchange for a
management fee paid quarterly and equal to 0.5% of our adjusted net assets. We amended the
Management Services Agreement on November 8, 2006, to clarify that adjusted net assets are not
reduced by non-cash charges associated with the Supplemental Put Agreement, 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, 2008, 2007 and 2006, we incurred $14.7 million, $10.1 million and $4.2 million,
respectively, in management fees to CGM.
CBS Personnel paid management fees of approximately $0.5 million for the year ended December 31,
2008 to a separate manager of Staffmark, unrelated to CGM.
LLC Agreement As distinguished from its provision of providing management services to us,
pursuant to the Management Services Agreement, CGM is the owner of 100% of the Allocation Interests
in us. CGM paid $0.1 million for these Allocation Interests and has the right to cause us to
purchase the Allocation Interests it owns. The Allocation Interests give CGM the right to
distributions pursuant to a profit allocation formula upon the occurrence of certain events.
Certain events include, but are not limited to, the dispositions of subsidiaries. In connection
with the dispositions of Silvue and Aeroglide in 2008 we paid CGM a profit allocation of $14.9
million. In connection with the disposition of Crosman in 2006, we paid CGM a profit allocation of
$7.9 million.
Supplemental Put Agreement Concurrent with the IPO, we and CGM entered into a
Supplemental Put Agreement, which may require us to acquire the Allocation Interests, described
above, upon termination of the Management Services Agreement. Essentially, the put rights granted
to CGM require us to acquire CGMs Allocation Interests in us at a price based on a percentage of
the increase in fair value in our businesses over our basis in those businesses. Each fiscal
quarter we estimate the fair value of our businesses for the purpose of determining our potential
liability associated with the Supplemental Put Agreement. Any change in the potential liability is
accrued currently as a non-cash adjustment to earnings. For the years ended December 31, 2008,
2007 and 2006, we recognized approximately $6.4 million, $7.4 million and $22.5 million in expense
related to the Supplemental Put Agreement.
Cost Reimbursement and Fees
We reimbursed our Manager, CGM, approximately $2.6 million, $1.8 million and $0.7 million,
principally for occupancy and staffing costs incurred by CGM on our behalf during the years ended
December 31, 2008, 2007 and 2006, respectively.
CGM acted as an advisor for each of the 2008 acquisitions (Fox and Staffmark) for which it received
transaction service and expense payments of approximately $2.0 million. CGM acted as an advisor
for each of the 2007 acquisitions (Aeroglide, HALO and American Furniture) for which it received
transaction service and expense payments of approximately $2.1 million.
95
We have entered into the following related party transactions with our subsidiaries:
Anodyne
On July 31, 2006, we acquired from CGI and its wholly-owned, indirect subsidiary, Compass Medical
Mattress Partners, LP (the Seller) approximately 47.3% of the outstanding capital stock, on a
fully-diluted basis, of
Anodyne, representing approximately 69.8% of the voting power of all Anodyne stock. Pursuant to
the same agreement, we also acquired from the Seller all of the Original Loans. On the same date,
we entered into a Note Purchase and Sale Agreement with CGI and the Seller for the purchase from
the Seller of a Promissory Note
(Note) issued by a borrower controlled by Anodynes chief
executive officer. The Note was secured by shares of Anodyne stock and guaranteed by Anodynes
chief executive officer. The Note accrued interest at the rate of 13% per annum and was added to
the Notes principal balance. The balance of the Note plus accrued interest totaled approximately
$6.4 million at December 31, 2007. The Note was to mature on August 15, 2008. We recorded
interest income totaling $0.5 million, $0.8 million and $0.3 million in 2008, 2007 and 2006,
respectively, related to this note.
CGM acted as an advisor to us in the Anodyne transaction for which it received transaction services
fees and expense payments totaling approximately $0.3 million in 2006.
On August 8, 2008 we exchanged the aforementioned Note, due August 15, 2008, totaling approximately
$6.9 million (including accrued interest) due from the former CEO of Anodyne in exchange for shares
of stock of Anodyne held by the CEO. In addition, the former CEO of Anodyne was granted an option
to purchase approximately 10% of the outstanding shares of Anodyne, at a strike price exceeding the
exchange price, from us in the future for which the former CEO exchanged Anodyne stock valued at
$0.2 million (the fair value of the option at the date of grant) as consideration.
In addition, on August 5, 2008 we exchanged $1.5 million in term debt due from Anodyne for 15,500
shares of common stock and 13,950 shares of convertible preferred stock of Anodyne.
As a result of the above transactions our ownership percentage in Anodyne increased to
approximately 67% on a primary basis and 57% on a fully diluted basis.
Advanced Circuits
In connection with the acquisition of Advanced Circuits by CGI in September 2005, Advanced Circuits
loaned certain officers and members of management of Advanced Circuits $3.4 million for the
purchase of 136,364 shares of Advanced Circuits common stock. On January 1, 2006, Advanced
Circuits loaned certain officers and members of management of Advanced Circuits $4.8 million for
the purchase of an additional 193,366 shares of Advanced 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.
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. We believe 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 each of the fiscal years 2008, 2007 and 2006, ACI accrued approximately $1.6 million for
this loan forgiveness. This expense has been classified as a component of general and
administrative expense. Approximately $5.2 million and $3.7 million is reflected as a component of
other non-current liabilities in the consolidated balances sheets as of December 31, 2008 and 2007,
respectively, in connection with these two agreements.
On October 10, 2007, we entered into an amendment to our Loan Agreement (the Amendment) with ACI,
to amend that certain loan agreement, dated as of May 16, 2006, between us and ACI (the Loan
Agreement). The Loan Agreement was amended to (i) provide for additional term loan borrowings of
$47.0 million and to permit the proceeds thereof to fund cash distributions totaling $47.0 million
by ACI to Compass AC Holdings, Inc. (ACH), ACIs sole shareholder, and by ACH to its
shareholders, including us, (ii) extend the maturity dates of the loans under the Loan Agreement,
and (iii) modify certain financial covenants of ACI under the Loan Agreement. Our share of the cash
distribution was approximately $33.0 million with approximately $14.0 million being distributed to
ACHs other shareholders. All other material terms and conditions of the Loan Agreement were
unchanged.
American Furniture
AFMs largest supplier, Independent Furniture Supply (Independent), is 50% owned by Mike Thomas,
AFMs CEO. AFM purchases polyfoam from Independent on an arms-length basis and AFM performs
regular audits to verify market pricing. AFM does not have any long-term supply contracts with
Independent. Total purchases
from Independent during 2008 totaled approximately $18.4 million. From August 31, 2007
(acquisition date) to December 31, 2007, purchases from Independent totaled approximately $8.4 million.
96
Fox
Fox leases its principal manufacturing and office facilities in Watsonville, California from Robert
Fox, a founder, Chief Engineering Officer and minority shareholder of Fox. The term of the lease
is through July of 2018 and the rental payments can be adjusted annually for a cost-of-living
increase based upon the consumer price index. Fox is responsible for all real estate taxes,
insurance and maintenance related to this property. The leased facilities are 86,000 square feet
and Fox paid rent under this lease of approximately $1.0 million for the year ended December 31,
2008.
Other
We reimbursed CGI, which owns 22.3% of the Trust shares, approximately $2.5 million for costs
incurred by CGI in connection with our IPO in 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,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than |
|
|
Total |
|
Less than 1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
Long-term debt obligations (1) |
|
$ |
209,333 |
|
|
$ |
88,282 |
|
|
$ |
26,112 |
|
|
$ |
90,859 |
|
|
$ |
4,080 |
|
Capital lease obligations |
|
|
1,340 |
|
|
|
485 |
|
|
|
477 |
|
|
|
378 |
|
|
|
|
|
Operating lease obligations (2) |
|
|
53,201 |
|
|
|
13,503 |
|
|
|
18,040 |
|
|
|
9,696 |
|
|
|
11,962 |
|
Purchase obligations (3) |
|
|
133,515 |
|
|
|
73,983 |
|
|
|
31,794 |
|
|
|
27,738 |
|
|
|
|
|
Supplemental put obligation (4) |
|
|
13,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
410,800 |
|
|
$ |
176,253 |
|
|
$ |
76,423 |
|
|
$ |
128,671 |
|
|
$ |
16,042 |
|
|
|
|
|
|
|
(1) |
|
Reflects commitment fees and letter of credit fees under our Revolving Credit Facility and
amounts due, together with interest on our Term Loan Facility. We paid $75.0 million of our
Term Loan Facility on February 18, 2009. This payment is reflected in the less than 1 year
column. The impact of a reduction in future interest expense related to this payment has also
been reflected in the above table. |
|
(2) |
|
Reflects various operating leases for office space, manufacturing facilities and equipment
from third parties. |
|
(3) |
|
Reflects non-cancelable commitments as of December 31, 2008, including: (i) shareholder
distributions of $42.9 million, (ii) management fees of $13.8 million per year over the next
five years and; (iii) other obligations, including amounts due under employment agreements.
Distributions to our shareholders are approved by our Board of Directors each fiscal quarter.
The amount approved for future quarters may differ from the amount included in this schedule. |
|
(4) |
|
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 $40.9 million at December 31, 2008, is included in our
consolidated balance sheet as a component of workers compensation liability.
97
Critical Accounting Estimates
The following discussion relates to critical accounting policies for the Company, the Trust and
each of our businesses.
The preparation of our financial statements in conformity with GAAP will require management to
adopt accounting policies and make estimates and judgments that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from these estimates
under different assumptions and judgments and uncertainties, and potentially could result in
materially different results under different conditions. Our critical accounting estimates are
discussed below. These critical accounting estimates are reviewed by our independent auditors and
the audit committee of our board of directors.
Supplemental Put Agreement
In connection with our Management Services Agreement, we entered into a supplemental put agreement
with our Manager pursuant to which our Manager has the right to cause the Company to purchase the
Allocation Interests then owned by our Manager upon termination of the management services
agreement for a price to be determined in accordance with the supplemental put agreement. We
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. 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.
Derivatives and Hedging
We utilize an interest rate swap (derivative) to manage risks related to interest rates on the last
$140.0 million of our Term Loan Facility. Accounting for derivatives as hedges requires that, at
inception and over the term of the arrangement, the hedged item and related derivative meet the
requirements for hedge accounting. The rules and interpretations related to derivatives accounting
are complex. Failure to apply this complex guidance correctly will result in all changes in the
fair value of the derivative being reported in earnings, without regard to the offsetting changes
in the fair value of the hedged item. Currently the change in fair value is reflected in other
comprehensive income.
At December 31, 2008, derivative liabilities were $5.2 million and represented the mark-to-market
unrealized loss on our interest rate swap.
On February 18, 2009, the Company terminated a portion of its Swap in connection with the repayment
of $75.0 million of the Term Loan Facility. In connection with the termination, the Company
reclassified $2.6 million from accumulated other comprehensive loss into earnings. Refer to Note S
of the consolidated financial statements for additional information.
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.
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
(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.
98
Business Combinations
The acquisitions of our businesses are accounted for under the purchase method of accounting. The
amounts assigned to the identifiable assets acquired and liabilities assumed in connection with
acquisitions are based on estimated fair values as of the date of the acquisition, with the
remainder, if any, to be recorded as identifiable intangibles or goodwill. The fair values are
determined by our management team, taking into consideration information supplied by the management
of the acquired entities and other relevant information. Such information typically includes
valuations supplied by independent appraisal experts for significant business combinations. The
valuations are generally based upon future cash flow projections for the acquired assets,
discounted to present value. The determination of fair values requires significant judgment both
by our management team and by outside experts engaged to assist in this process. This judgment
could result in either a higher or lower value assigned to amortizable or depreciable assets. The
impact could result in either higher or lower amortization and/or depreciation expense.
Goodwill, Intangible Assets and Property and Equipment
Goodwill represents the excess of the purchase price over the fair value of the assets acquired.
Trademarks are considered to be indefinite lived intangibles. Trademarks and goodwill are not
amortized. However, we are required to perform impairment reviews at least annually and more
frequently in certain circumstances.
The goodwill impairment test is a two-step process, which requires management to make judgments in
determining certain assumptions used in the calculation. The first step of the process consists of
estimating the fair value of each of our reporting units based on a discounted cash flow model
using revenue and profit forecasts and comparing those estimated fair values with the carrying
values, which include allocated goodwill. If the estimated fair value is less than the carrying
value, a second step is performed to compute the amount of the impairment by determining an
implied fair value of goodwill. The determination of a reporting 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.
Given significant changes in the business climate in the fourth quarter of 2008, we retested
goodwill for impairment at two of our reporting units, CBS Personnel and American Furniture at
December 31, 2008. In performing this test, we revised our estimated future cash flows, as
appropriate, to reflect current market conditions and risk within these industries, as well as
market data of our competitors. In each case, no impairment was indicated at this time. If market
conditions continue to deteriorate in the markets that CBS Personnel and American Furniture
operate, it is likely that we will be required to retest goodwill and indefinite lived intangibles
which may result in write downs to their fair value.
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.
Intangible assets subject to amortization, including customer relationships, non-compete agreements
and technology are amortized using the straight-line method over the estimated useful lives of the
intangible assets, which we determine based on the consideration of several factors including the
period of time the asset is expected to remain in service. We evaluate the carrying value and
remaining useful lives of intangible assets subject to amortization whenever indications of
impairment are present.
Property and equipment are initially stated at cost. Depreciation on property and equipment is
principally 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.
99
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 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 Personnel is an employer with self-insurance and large deductible plans for its workers
compensation exposure. CBS Personnel 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 Personnel continually evaluates the potential for change in loss
estimates with the support of qualified actuaries. As of December 31, 2008, CBS Personnel had
approximately $67.8 million in workers compensation liability related to claims, reserves and
settlements. The ultimate settlement of this liability could differ materially from the
assumptions used to calculate this liability, which could have a material adverse effect on future
operating results.
Deferred Tax Assets
Several of our majority owned subsidiaries have deferred tax assets recorded at December 31, 2008
which in total amount to approximately $23.6 million. These deferred tax assets are comprised of
reserves not currently deductible for tax purposes. The temporary differences that have resulted
in the recording of these tax assets may be used to offset taxable income in future periods,
reducing the amount of taxes we might otherwise be required to pay. Realization of the deferred
tax assets is dependent on generating sufficient future taxable income. Based upon the expected
future results of operations, we believe it is more likely than not that we will generate
sufficient future taxable income to realize the benefit of existing temporary differences, although
there can be no assurance of this. The impact of not realizing these deferred tax assets would
result in an increase in income tax expense for such period when the determination was made that
the assets are not realizable. (See Note M Income taxes)
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, or (SFAS 141R). SFAS 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statement to evaluate the nature and financial effects of
the business combination. SFAS 141R is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Accordingly, any business combinations we engage in will be
recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will
have an impact on our consolidated financial statements when effective, but the nature and
magnitude of the specific
effects will depend upon the nature, terms and size of the acquisitions we consummate after the
effective date. We are still assessing the impact of this standard on our future consolidated
financial statements.
100
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51, or (SFAS 160), which we will adopt on January
1, 2009. SFAS 160 will significantly change the accounting and reporting related to a
non-controlling interest in a subsidiary. Specifically, this statement requires the recognition of
a non-controlling interest (minority interest) as equity in the consolidated financial statements
and separate from the parents equity. The amount of net income attributable to the non-controlling
interest will be included in consolidated net income on the face of the income statement. SFAS 160
clarifies that changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling financial interest.
In addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
non-controlling equity investment on the deconsolidation. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its non-controlling interest.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. Earlier adoption is prohibited. After adoption, non-controlling
interests will be classified as shareholders equity, a change from its current classification
between liabilities and shareholders equity. Earnings attributable to minority interests will be
included in net income, although such earnings will continue to be deducted to measure earnings per
share. Purchases and sales of minority interests will be reported in equity.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133, or (SFAS 161). This statement is intended to
improve transparency in financial reporting by requiring enhanced disclosures of an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) as
well as related hedged items, bifurcated derivatives, and non-derivative instruments that are
designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must
provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is
effective prospectively for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application permitted. We are currently evaluating
the disclosure implications of this statement.
On April 25, 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets. This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (which we refer to as SFAS 142). The intent of this FSP is
to improve the consistency between the useful life of a recognized intangible asset under SFAS 142
and the period of expected cash flows used to measure the fair value of the asset under SFAS No.
141 (Revised 2007), Business Combinations, and other U.S. GAAP. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The adoption of this FSP may impact the
useful lives we assign to intangible assets that are acquired through future business combinations.
On October 10, 2008, the FASB staff issued Staff Position (FSP) No. SFAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active, or (FSP 157-3),
which amends SFAS No. 157 by incorporating an example to illustrate key considerations in
determining the fair value of a financial asset in an inactive market. FSP 157-3 was effective on
October 10, 2008. We have adopted provisions of SFAS No. 157 and incorporated the considerations
of this FSP in determining the fair value of our financial assets. FSP 157-3 did not have a
material impact on our financial statements.
101
ITEM
7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
At December 31, 2008, we were exposed to interest rate risk primarily through borrowings under our
Credit Agreement because borrowings under this agreement are subject to variable interest rates.
We had outstanding $153.0 million under the Term Loan Facility portion of our Credit Agreement at
December 31, 2008. We fixed $140.0 million of these outstanding borrowings on January 22, 2008
with a floating-to-fixed interest rate swap with a bank.
On February 18, 2009, we repaid $75.0 million of our outstanding Term Loan Facility and, in
connection with this repayment, terminated $70.0 million of our interest rate swap. Our exposure to
fluctuation in variable interest on the remaining $8.0 million is not deemed to be material to our
financial condition or results of operations.
We expect to borrow under our Revolving Credit Facility in the future in order to finance our short
term working capital needs and future acquisitions.
Exchange Rate Sensitivity
At December 31, 2008, we were not exposed to significant foreign currency exchange rate risks that
could have a material effect on our financial condition or results of operations.
Credit Risk
We are exposed to credit risk associated with cash equivalents, investments, and trade receivables.
We do not believe that our cash equivalents or investments present significant credit risks because
the counterparties to the instruments consist of major financial institutions and we manage the
notional amount of contracts entered into with any one counterparty. Our cash and cash equivalents
at December 31, 2008 consists principally of (i) Treasury and Government securities money market
funds, (ii) insured prime money market funds, (iii) FDIC insured Certificates of Deposit, (iv)
government insured Commercial Paper and, (v) cash balances in several non-interest bearing checking
accounts. Substantially all trade receivable balances of our businesses are unsecured. The
concentration of credit risk with respect to trade receivables is limited by the large number of
customers in our customer base and their dispersion across various industries and geographic areas.
Although we have a large number of customers who are dispersed across different industries and
geographic areas, a prolonged economic downturn could increase our exposure to credit risk on our
trade receivables. We perform ongoing credit evaluations of our customers and maintain an allowance
for potential credit losses.
102
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules referred to in the index
contained on page F-1 of this report are incorporated herein by reference.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
ITEM 9A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a) Managements Evaluation of Disclosure Controls and Procedures. The Companys management, with
the participation of the Companys Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of December
31, 2008, the Companys disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act and in ensuring that information
required to be disclosed by the Company in such reports is accumulated and communicated to the
Companys management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely discussions regarding require disclosure.
(b) Information with respect to Report of Management on Internal Control over Financial Reporting
is contained on page F- 2 of this report and is incorporated herein by reference.
(c) Information with respect to Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting is contained on page F- 3 of this report and is
incorporated herein by reference.
(d) Changes in Internal Control over Financial Reporting. There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during our fourth fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
103
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our executive officers is incorporated herein by reference to information
included in the Proxy Statement for our 2009 Annual Meeting of Shareholders.
Information with respect to our directors and the nomination process is incorporated herein by
reference to information included in the Proxy Statement for our 2009 Annual Meeting of
Shareholders.
Information regarding our audit committee and our audit committee financial experts is incorporated
herein by reference to information included in the Proxy Statement for our 2009 Annual Meeting of
Shareholders.
Information required by Item 405 of Regulation S-K is incorporated herein by reference to
information included in the Proxy Statement for our 2009 Annual Meeting of Shareholders.
The audit committee operates under a written charter, which reflects NASDAQ listing standards and
Sarbanes-Oxley Act requirements regarding audit committees. A copy of the charter is incorporated
herein by reference to Exhibit A to the Proxy Statement for our 2009 Annual Meeting of Shareholders
and is available on the companys website at
www.compassdiversifiedholdings.com. We intend to
satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
from, a provision of this charter by posting such information on our web site at the address and
location specified above.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to
information included in the Proxy Statement for our 2009 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER
MATTERS
Information with respect to security ownership of certain beneficial owners and management is
incorporated herein by reference to information included in the Proxy Statement for our 2009 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to such contractual relationships is incorporated herein by reference to
the information in the Proxy Statement for our 2009 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accounting fees and services and pre-approval policies are
incorporated herein by reference to information included in the Proxy Statement for our 2009 Annual
Meeting of Shareholders
104
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
1. |
|
Financial Statements
See Index to Consolidated Financial Statements and Supplemental Financial Data filed
with this Annual Report on Form 10-K set forth on page F-1. |
|
|
2. |
|
Financial Statement Schedule
See Index to Consolidated Financial Statements and Supplemental Financial Data filed
with this Annual Report on Form 10-K set forth on page F-1. |
|
|
3. |
|
Exhibits
See Index to Exhibits filed with this Annual Report on Form 10-K set forth on page E-1. |
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this to be signed on its behalf by the undersigned, thereunto duly
authorized.
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|
|
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
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|
Date: April 9, 2009 |
By: |
/s/ I. Joseph Massoud
|
|
|
|
I. Joseph Massoud |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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Signature |
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Title |
|
Date |
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/s/ I. Joseph Massoud
I. Joseph Massoud
|
|
Chief Executive Officer
(Principal Executive Officer)
and Director
|
|
April 9, 2009 |
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|
|
|
|
/s/ James J. Bottiglieri
James J. Bottiglieri
|
|
Chief Financial Officer
(Principal Financial and
Accounting Officer)
and Director
|
|
April 9, 2009 |
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|
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|
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Director
|
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Director
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Director
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Director
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Director
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106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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|
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COMPASS DIVERSIFIED HOLDINGS
|
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Date: April 9, 2009 |
By: |
/s/ James J. Bottiglieri
|
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|
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James J. Bottiglieri |
|
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Regular Trustee |
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107
Compass Diversified Holdings
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL FINANCIAL DATA
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Page |
|
|
Numbers |
Historical Financial Statements: |
|
|
|
|
|
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
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F-6 |
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F-7 |
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F-8 |
|
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F-9 |
|
|
|
Supplemental Financial Data: |
|
|
The following supplementary financial data of the registrant and its subsidiaries required to be
included in Item 15(a) (2) of Form 10-K are listed below: |
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
|
|
|
|
All other schedules not listed above have been omitted as not applicable or because the required
information is included in the Consolidated Financial Statements or in the notes thereto. |
|
|
F-1
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Compass Diversified Holdings (Compass) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Compass internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and fair presentation of financial statements issued for
external purposes in accordance with accounting principles generally accepted in the United States
of America (US GAAP). Compass internal control over financial reporting includes those policies
and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of assets of the company; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets of the company that could
have a material effect on the consolidated financial statements. |
Internal control over financial reporting includes the entity level environment, controls
activities, monitoring and internal auditing practices and actions taken by management to correct
deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect all misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Compass internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, management determined that Compass
maintained effective internal control over financial reporting as of December 31, 2008.
The effectiveness of our internal control over financial reporting has been audited by Grant
Thornton, LLP an independent registered public accounting firm, as stated in their report which
appears on page F-3.
March 12, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Compass Diversified Holdings
We have audited Compass Diversified Holdings (formerly Compass Diversified Trust) (a Delaware
Trust) and Subsidiaries internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Compass Diversified Holdings and
Subsidiaries management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on Compass Diversified Holdings and
Subsidiaries internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Compass Diversified Holdings and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Compass Diversified Holdings and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders equity, cash flows, and financial statement schedule listed in the index
appearing under Item 15(a)(2) for each of the three years in the period ended December 31, 2008,
and our report dated March 12, 2009 expressed an unqualified opinion.
/s/ Grant
Thornton LLP
New York, New York
March 12, 2009
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Compass Diversified Holdings
We have audited the accompanying consolidated balance sheets of Compass Diversified Holdings
(formerly Compass Diversified Trust) (a Delaware Trust) and Subsidiaries as of December 31,
2008 and 2007, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2008. Our audits of
the basic financial statements include the financial statement schedule listed in the index
appearing under Item 15(a)(2). These financial statements and financial schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Compass Diversified Holdings and Subsidiaries as
of December 31, 2008 and 2007, and the results of its operations and its cash flows for each
for each of the three years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the information set
forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Compass Diversified Holdings and Subsidiaries internal
control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) and our report dated March 12, 2009 expressed an unqualified
opinion thereon.
/s/ Grant
Thornton LLP
New York, New York
March 12, 2009
F-4
Compass Diversified Holdings
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
97,473 |
|
|
$ |
115,500 |
|
Accounts receivable, less allowances of $4,824 at December 31, 2008
and $3,204 at December 31, 2007 |
|
|
164,035 |
|
|
|
111,718 |
|
Inventories |
|
|
50,909 |
|
|
|
35,492 |
|
Prepaid expenses and other current assets |
|
|
22,784 |
|
|
|
11,088 |
|
Current assets of discontinued operations |
|
|
|
|
|
|
25,443 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
335,201 |
|
|
|
299,241 |
|
Property, plant and equipment, net |
|
|
30,763 |
|
|
|
20,437 |
|
Goodwill |
|
|
339,095 |
|
|
|
218,817 |
|
Intangible assets, net |
|
|
249,489 |
|
|
|
163,378 |
|
Deferred debt issuance costs, less accumulated amortization of
$3,317 at December 31, 2008 and $1,348 at December 31, 2007 |
|
|
8,251 |
|
|
|
9,613 |
|
Other non-current assets |
|
|
21,537 |
|
|
|
17,549 |
|
Non-current assets of discontinued operations |
|
|
|
|
|
|
98,967 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
984,336 |
|
|
$ |
828,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
48,699 |
|
|
$ |
34,306 |
|
Accrued expenses |
|
|
57,109 |
|
|
|
33,969 |
|
Due to related party |
|
|
604 |
|
|
|
814 |
|
Current portion, long-term debt |
|
|
2,000 |
|
|
|
2,000 |
|
Current portion of workers compensation liability |
|
|
26,916 |
|
|
|
6,881 |
|
Other current liabilities |
|
|
4,042 |
|
|
|
560 |
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
28,083 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
139,370 |
|
|
|
106,613 |
|
Supplemental put obligation |
|
|
13,411 |
|
|
|
21,976 |
|
Deferred income taxes |
|
|
86,138 |
|
|
|
59,478 |
|
Long-term debt |
|
|
151,000 |
|
|
|
148,000 |
|
Workers compensation liability |
|
|
40,852 |
|
|
|
16,791 |
|
Other non-current liabilities |
|
|
9,687 |
|
|
|
4,628 |
|
Non-current liabilities and minority interest of discontinued operations |
|
|
|
|
|
|
15,799 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
440,458 |
|
|
|
373,285 |
|
Minority interest |
|
|
79,431 |
|
|
|
21,867 |
|
Stockholders equity |
|
|
|
|
|
|
|
|
Trust shares, no par value, 500,000 authorized; 31,525 shares issued
and outstanding at December 31, 2008 and December 31, 2007 |
|
|
443,705 |
|
|
|
443,705 |
|
Accumulated other comprehensive loss |
|
|
(5,242 |
) |
|
|
|
|
Accumulated earnings (deficit) |
|
|
25,984 |
|
|
|
(10,855 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
464,447 |
|
|
|
432,850 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
984,336 |
|
|
$ |
828,002 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
Compass Diversified Holdings
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
532,127 |
|
|
$ |
271,911 |
|
|
$ |
42,752 |
|
Service revenues |
|
|
1,006,346 |
|
|
|
569,880 |
|
|
|
352,421 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,538,473 |
|
|
|
841,791 |
|
|
|
395,173 |
|
Cost of sales |
|
|
363,675 |
|
|
|
171,665 |
|
|
|
22,479 |
|
Cost of services |
|
|
832,531 |
|
|
|
464,343 |
|
|
|
284,535 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
342,267 |
|
|
|
205,783 |
|
|
|
88,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Staffing expense |
|
|
102,438 |
|
|
|
56,207 |
|
|
|
34,345 |
|
Selling, general and administrative expense |
|
|
165,768 |
|
|
|
94,426 |
|
|
|
31,605 |
|
Supplemental put expense |
|
|
6,382 |
|
|
|
7,400 |
|
|
|
22,456 |
|
Management fees |
|
|
15,205 |
|
|
|
10,120 |
|
|
|
4,158 |
|
Amortization expense |
|
|
24,605 |
|
|
|
12,679 |
|
|
|
5,814 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
27,869 |
|
|
|
24,951 |
|
|
|
(10,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,377 |
|
|
|
2,520 |
|
|
|
804 |
|
Interest expense |
|
|
(17,828 |
) |
|
|
(6,994 |
) |
|
|
(6,057 |
) |
Amortization of debt issuance costs |
|
|
(1,969 |
) |
|
|
(1,232 |
) |
|
|
(779 |
) |
Loss on debt extinguishment |
|
|
|
|
|
|
|
|
|
|
(8,275 |
) |
Other income (expense), net |
|
|
894 |
|
|
|
(26 |
) |
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and minority
interest |
|
|
10,343 |
|
|
|
19,219 |
|
|
|
(24,037 |
) |
Provision for income taxes |
|
|
6,526 |
|
|
|
9,168 |
|
|
|
3,936 |
|
Minority interest |
|
|
3,493 |
|
|
|
10,997 |
|
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
324 |
|
|
|
(946 |
) |
|
|
(29,080 |
) |
Income from discontinued operations, net of income tax |
|
|
4,607 |
|
|
|
5,480 |
|
|
|
9,831 |
|
Gain on sale of discontinued operations, net of income tax |
|
|
73,363 |
|
|
|
35,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
78,294 |
|
|
$ |
40,368 |
|
|
$ |
(19,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted income (loss) per share from continuing operations |
|
$ |
0.01 |
|
|
$ |
(0.04 |
) |
|
$ |
(2.29 |
) |
Basic and fully diluted income per share from discontinued operations |
|
|
2.47 |
|
|
|
1.50 |
|
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted net income (loss) per share |
|
$ |
2.48 |
|
|
$ |
1.46 |
|
|
$ |
(1.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of trust stock outstanding basic and
fully
diluted |
|
|
31,525 |
|
|
|
27,629 |
|
|
|
12,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share |
|
$ |
1.33 |
|
|
$ |
1.25 |
|
|
$ |
0.7327 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
Compass Diversified Holdings
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Other |
|
|
Total |
|
|
|
Number of |
|
|
|
|
|
|
Earnings |
|
|
Comprehensive |
|
|
Stockholders |
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
(Deficit) |
|
|
Loss |
|
|
Equity |
|
Balance January 1, 2006 |
|
|
|
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
(1 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
(19,249 |
) |
|
|
|
|
|
|
(19,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,249 |
) |
Issuance of trust shares,
net of offering costs |
|
|
19,500 |
|
|
|
269,816 |
|
|
|
|
|
|
|
|
|
|
|
269,816 |
|
Issuance of trust shares
Anodyne acquisition |
|
|
950 |
|
|
|
13,100 |
|
|
|
|
|
|
|
|
|
|
|
13,100 |
|
Distributions paid |
|
|
|
|
|
|
(7,955 |
) |
|
|
|
|
|
|
|
|
|
|
(7,955 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
20,450 |
|
|
|
274,961 |
|
|
|
(19,250 |
) |
|
|
|
|
|
|
255,711 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
40,368 |
|
|
|
|
|
|
|
40,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,368 |
|
Issuance of trust shares,
net of offering costs |
|
|
11,075 |
|
|
|
168,744 |
|
|
|
|
|
|
|
|
|
|
|
168,744 |
|
Distributions paid |
|
|
|
|
|
|
|
|
|
|
(31,973 |
) |
|
|
|
|
|
|
(31,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007 |
|
|
31,525 |
|
|
|
443,705 |
|
|
|
(10,855 |
) |
|
|
|
|
|
|
432,850 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
78,294 |
|
|
|
|
|
|
|
78,294 |
|
Other comprehensive loss
cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,242 |
) |
|
|
(5,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,052 |
|
Distributions paid |
|
|
|
|
|
|
|
|
|
|
(41,455 |
) |
|
|
|
|
|
|
(41,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008 |
|
|
31,525 |
|
|
$ |
443,705 |
|
|
$ |
25,984 |
|
|
$ |
(5,242 |
) |
|
$ |
464,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
Compass Diversified Holdings
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
78,294 |
|
|
$ |
40,368 |
|
|
$ |
(19,249 |
) |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of 2008 dispositions |
|
|
(73,363 |
) |
|
|
|
|
|
|
|
|
Gain on sale of 2007 disposition |
|
|
|
|
|
|
(35,834 |
) |
|
|
|
|
Depreciation expense |
|
|
9,276 |
|
|
|
5,010 |
|
|
|
2,494 |
|
Amortization expense |
|
|
25,745 |
|
|
|
19,097 |
|
|
|
7,032 |
|
Amortization of debt issuance costs |
|
|
1,969 |
|
|
|
1,224 |
|
|
|
764 |
|
Loss on debt extinguishment |
|
|
|
|
|
|
|
|
|
|
8,275 |
|
Supplemental put expense |
|
|
6,382 |
|
|
|
7,400 |
|
|
|
22,456 |
|
Minority interests |
|
|
4,042 |
|
|
|
11,940 |
|
|
|
2,950 |
|
Minority stockholder charges |
|
|
2,827 |
|
|
|
1,080 |
|
|
|
2,760 |
|
Deferred taxes |
|
|
(8,911 |
) |
|
|
(1,295 |
) |
|
|
(2,281 |
) |
In-process research and development expense |
|
|
|
|
|
|
|
|
|
|
1,120 |
|
Other |
|
|
381 |
|
|
|
86 |
|
|
|
(450 |
) |
Changes in operating assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)/decrease in accounts receivable |
|
|
29,970 |
|
|
|
(13,233 |
) |
|
|
(7,867 |
) |
(Increase)/decrease in inventories |
|
|
102 |
|
|
|
(5,772 |
) |
|
|
(6,314 |
) |
(Increase)/decrease in prepaid expenses and other current assets |
|
|
(3,874 |
) |
|
|
2,003 |
|
|
|
(72 |
) |
Increase/(decrease) in accounts payable and accrued expenses |
|
|
(17,344 |
) |
|
|
17,578 |
|
|
|
8,945 |
|
Decrease in supplemental put obligation |
|
|
(14,947 |
) |
|
|
(7,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
40,549 |
|
|
|
41,772 |
|
|
|
20,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
(167,546 |
) |
|
|
(225,112 |
) |
|
|
(356,464 |
) |
Purchases of property and equipment |
|
|
(11,576 |
) |
|
|
(8,698 |
) |
|
|
(5,822 |
) |
Proceeds from 2008 dispositions |
|
|
154,156 |
|
|
|
|
|
|
|
|
|
Proceeds from 2007 disposition |
|
|
|
|
|
|
119,652 |
|
|
|
|
|
Changes in minority interest |
|
|
2,251 |
|
|
|
|
|
|
|
|
|
Other investing activities |
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(22,542 |
) |
|
|
(114,158 |
) |
|
|
(362,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Credit Agreement |
|
|
90,000 |
|
|
|
311,977 |
|
|
|
85,004 |
|
Repayments under Credit Agreement |
|
|
(87,532 |
) |
|
|
(246,800 |
) |
|
|
|
|
Proceeds from the issuance of Trust shares, net |
|
|
|
|
|
|
168,744 |
|
|
|
284,969 |
|
Debt issuance costs |
|
|
(552 |
) |
|
|
(5,776 |
) |
|
|
(11,560 |
) |
Distributions paid |
|
|
(41,455 |
) |
|
|
(31,973 |
) |
|
|
(7,955 |
) |
Distributions paid Advanced Circuits |
|
|
|
|
|
|
(13,987 |
) |
|
|
|
|
Other |
|
|
(273 |
) |
|
|
2,697 |
|
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(39,812 |
) |
|
|
184,882 |
|
|
|
351,073 |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
(80 |
) |
|
|
(144 |
) |
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
|
|
(21,885 |
) |
|
|
112,352 |
|
|
|
9,610 |
|
Cash and cash equivalents beginning of period |
|
|
119,358 |
|
|
|
7,006 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
97,473 |
|
|
$ |
119,358 |
|
|
$ |
9,710 |
|
|
|
|
|
|
|
|
|
|
|
Cash related to discontinued operations |
|
$ |
|
|
|
$ |
3,858 |
|
|
$ |
4,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash financing and investing activity for the year ended December 31, 2008: |
|
|
|
Issuance of CBS Personnels common stock valued at $47.9 million in connection with the
acquisition of Staffmark. See Note C. |
|
|
|
Acquisition of $7.0 million of Anodyne common stock in connection with the
extinguishment of a promissory note due the Company by an employee of Anodyne.
See Note R. |
|
|
|
Capital leases totaling $0.9 million were entered into during 2008. |
See notes to consolidated financial statements.
F-8
Compass Diversified Holdings
Notes to Consolidated Financial Statements
December 31, 2008
Note A Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (the Trust), was incorporated in
Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited
liability Company (the Company), was also formed on November 18, 2005. Compass Group Management
LLC, a Delaware limited liability Company (CGM or the Manager), was the sole owner of 100% of
the interests of the Company (as defined in the Companys operating agreement, dated as of November
18, 2005), which were subsequently reclassified as the Allocation Interests pursuant to the
Companys amended and restated operating agreement, dated as of April 25, 2006 (as amended and
restated, the LLC Agreement) (see Note R Related Parties).
The Trust and the Company were formed to acquire and manage a group of small and middle-market
businesses headquartered in the United States. In accordance with the amended and restated Trust
Agreement, dated as of April 25, 2006 (the Trust Agreement), the Trust is sole owner of 100% of
the Trust Interests (as defined in the LLC Agreement) of the Company and, pursuant to the LLC
Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of
outstanding shares of the Trust. Compass Group Diversified Holdings, LLC, a Delaware limited
liability company is the operating entity with a board of directors and other corporate governance
responsibilities, similar to that of a Delaware corporation.
Note B Summary of Significant Accounting Policies
Accounting Principles
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP).
Basis of Presentation
The results of operations for the years ended December 31, 2008, 2007 and 2006 represent the
results of operations of the Companys acquired businesses from the date of their acquisition by
the Company, and therefore are not indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to the current years presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Trust and the Company, as well as
the businesses acquired as of their respective acquisition date. All significant intercompany
accounts and transactions have been eliminated in consolidation. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), discontinued
operating entities are reflected as discontinued operations in the Companys results of operations
and statements of financial position.
The acquisition of businesses that the Company owns or controls more than a 50% share of the voting
interest are accounted for under the purchase method of accounting. The amount assigned to the
identifiable assets acquired and the liabilities assumed is based on the estimated fair values as
of the date of acquisition, with the remainder, if any, recorded as goodwill.
Discontinued Operations
On January 5, 2007, the Company sold its majority owned subsidiary, Crosman Acquisition Corporation
(Crosman) for a total enterprise value of $143.0 million. As a result, the results of operations
of Crosman for the period from its acquisition by us (May 16, 2006) through December 31, 2006 are
reported as discontinued operations in accordance with SFAS 144.
On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide Corporation
(Aeroglide), for a total enterprise value of $95.0 million. As a result, the results of
operations of Aeroglide for the periods from its acquisition on February 28, 2007 through December
31, 2007, and from January 1, 2008 through the date of sale on June 24, 2008, are reported as
discontinued operations in accordance with SFAS 144. In addition, Aeroglides assets and
liabilities have been reclassified as discontinued operations on the consolidated balance sheet as
of December 31, 2007.
F-9
On June 25, 2008, the Company sold its majority owned subsidiary, Silvue Technologies Group, Inc.
(Silvue), for a total enterprise value of $95.0 million. As a result, the results of operations
of Silvue for the periods from its acquisition on May 16, 2006 through December 31, 2006, from
January 1, 2007 through December 31, 2007 and from January 1, 2008 through the date of sale on June
25, 2008, are reported as discontinued operations in accordance with SFAS 144. In addition,
Silvues assets and liabilities have been reclassified as discontinued operations on the
consolidated balance sheet as of December 31, 2007.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. It is
possible that in 2009 actual conditions could be worse than anticipated when we developed our
estimates and assumptions, which could materially affect our results of operations and financial
position. Such changes could result in future impairment of goodwill, intangibles and long-lived
assets, establishment of valuation allowances on deferred tax assets and increased tax liabilities.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying value of the Companys financial instruments, including cash, accounts receivable and
accounts payable approximate their fair value. Term Debt with a carrying value of $153.0 million at
December 31, 2008 had a fair value of approximately $133.6 million. The fair value is based on
interest rates that are currently available to the Company for issuance of debt with similar terms
and remaining maturities.
Revenue recognition
In accordance with Staff Accounting Bulletin 104, Revenue Recognition, the Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the sellers price to the buyer is fixed and determinable, and collection is
reasonably assured. Shipping and handling costs are charged to operations when incurred and are
classified as a component of cost of sales.
Advanced Circuits
Revenue is recognized upon shipment of product to the customer, net of sales returns and
allowances. Appropriate reserves are established for anticipated returns and allowances based on
past experience. Revenue is typically recorded at F.O.B. shipping point but for sales of certain
custom products, revenue is recognized upon completion and customer acceptance.
American Furniture
Revenue is recognized upon shipment of product to the customer, net of sales returns and
allowances. Appropriate reserves are established for anticipated returns and allowances based on
past experience. Revenue is typically recorded at F.O.B. shipping point.
Anodyne
Revenue is recognized upon shipment of product to the customer, net of sales returns and
allowances. Appropriate reserves are established for anticipated returns and allowances based on
past experience. Revenue is typically recorded at F.O.B. shipping point.
CBS Personnel
Revenue from temporary staffing services is recognized at the time services are provided by the
Company employees and is reported based on gross billings to customers. Revenue from employee
leasing services is recorded at the time services are provided and is reported on a net basis
(gross billings to clients less worksite employee salaries and payroll-related taxes). Revenue is
recognized for permanent placement services at the employee start date. Permanent placement
services are fully guaranteed to the satisfaction of the customer for a specified period.
Fox
Revenue is recognized upon shipment of product to the customer, net of sales returns and
allowances. Appropriate reserves are established for anticipated returns and allowances based on
past experience. Revenue is typically recorded at F.O.B. shipping point.
F-10
HALO
Revenue is recognized when an arrangement exists, the promotional or premium products have been
shipped, fees are fixed and determinable, and the collection of the resulting receivables is
probable. Over 90% of HALOs sales are drop-shipped.
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents.
Allowance for doubtful accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts in order
to reduce accounts receivable to their net realizable value. The Company estimates the amount of
the required allowance by reviewing the status of past-due receivables and analyzing historical bad
debt trends. When the Company becomes aware of circumstances that may impair a specific customers
ability to meet its financial obligations subsequent to the original sale, the Company will record
an allowance against amounts due, and thereby reduce the net receivable to the amount it reasonably
believes will be collectible. Accounts receivable balances are not collateralized.
Inventories
Inventories consist of manufactured goods and purchased goods acquired for resale. Manufactured
inventory costs include raw materials, direct and indirect labor and factory overhead. Inventories
are stated at lower of cost or market and are determined using the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment is recorded at cost. The cost of major additions or betterments is
capitalized, while maintenance and repairs that do not improve or extend the useful lives of the
related assets are expensed as incurred.
Depreciation is provided principally on the straight-line method over estimated useful lives.
Leasehold improvements are amortized over the life of the lease or the life of the improvement,
whichever is shorter.
The useful lives are as follows:
|
|
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Machinery, equipment and software
|
|
2 to 10 years |
Office furniture and equipment
|
|
3 to 7 years |
Leasehold improvements
|
|
Shorter of useful life or lease term |
Property, plant and equipment and other long-lived assets, that have useful lives, are evaluated
for impairment when events or changes in circumstances indicate that the carrying value of the
assets may not be recoverable. Upon the occurrence of a triggering event, the asset is reviewed to
assess whether the estimated undiscounted cash flows expected from the use of the asset plus
residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying
value exceeds the estimated recoverable amounts, the asset is written down to the estimated
discounted present value of the expected future cash flows from using the asset.
Goodwill and intangible assets
Goodwill represents the difference between purchase cost and the fair value of net assets acquired
in business acquisitions. Indefinite lived intangible assets, representing trademarks and trade
names, are not amortized until their useful life is determined to no longer be indefinite.
Goodwill and indefinite lived intangible assets are tested for impairment at least annually as of
April 30th of each year, unless circumstances otherwise dictate, by comparing the fair
value of each reporting unit to its carrying value. Fair value is determined using a discounted
cash flow methodology and includes managements assumptions on revenue, growth rates, operating
margins, appropriate discount rates and expected capital expenditures. Impairments, if any, are
charged directly to earnings. Intangible assets with a useful life include customer relations,
technology and licensing agreements that are subject to amortization, and are evaluated for
impairment whenever events or changes in circumstances indicate that the carrying value of the
assets may not be fully recoverable.
Deferred debt issuance costs
Deferred debt issuance costs represent the costs associated with the issuance of debt instruments
and are amortized over the life of the related debt instrument.
Workers compensation liability
Workers compensation liability represents estimated costs of self insurance associated with
workers compensation at the Companys subsidiary CBS Personnel. The reserves for workers
compensation are based upon actuarial assumptions of individual case estimates and incurred but not
reported (IBNR) losses. At December 31, 2008 and 2007, the current portion of these reserves is
included as a component of current workers compensation liability and the non-current portion is
included as a component of workers compensation liability on the consolidated balance sheets.
F-11
Warranties
The Company estimates its exposure to warranty claims based on both current and historical product
sales data and warranty costs incurred. The majority of Foxs products carry one- to two-year
warranties. The Company assesses the adequacy of its recorded warranty liability quarterly and
adjusts the amount as necessary. The warranty liability was $1.4 million at December 31, 2008 and
is included in accrued expenses in the accompanying consolidated balance sheet. The Company
accrued for $2.1 million of warranty liability and paid $1.5 million in warranty claims, during the
year ended December 31, 2008.
Supplemental put
As distinct from its role as Manager of the Company, CGM is also the owner of 100% of the
Allocation Interests in the Company. Concurrent with the IPO, CGM and the Company entered into a
Supplemental Put Agreement, which may require the Company to acquire these Allocation Interests
upon termination of the Management Services Agreement. Essentially, the put right granted to CGM
requires the Company to acquire CGMs Allocation Interests in the Company at a price based on a
percentage of the increase in estimated fair value in the Companys businesses over its basis in
those businesses. Each fiscal quarter the Company estimates the fair value of its businesses for
the purpose of determining its potential liability associated with the Supplemental Put Agreement.
Any change in the potential liability is accrued currently as a non-cash adjustment to earnings.
For the years ended December 31, 2008, 2007 and 2006, the Company recognized approximately $6.4
million, $7.4 million and $22.5 million, respectively, in expense related to the Supplemental Put
Agreement. Upon the sale of any of the majority owned subsidiaries, the Company will be obligated
to pay CGM the amount of the accrued supplemental put liability allocated to the sold subsidiary.
Derivatives and Hedging
The Company utilizes an interest rate swap (derivative) to manage risks related to interest rates
on the last $140.0 million of its Term Loan Facility. The Company has elected hedge accounting
treatment to account for its interest rate swap. The Company has designated the interest rate swap
as a cash flow hedge and as a result unrealized changes in fair value of the hedge are reflected in
comprehensive income.
At December 31, 2008, derivative liabilities were $5.2 million and represented the mark-to-market
unrealized loss on the interest rate swaps.
On February 18, 2009, the Company terminated a portion of its Swap in connection with the repayment
of $75.0 million of the Term Loan Facility. In connection with the termination, the Company
reclassified $2.6 million from accumulated other comprehensive loss into earnings. Refer to Note S
for additional information.
Income taxes
Deferred income taxes are calculated under the liability method. Deferred income taxes are
provided for the differences between the basis of assets and liabilities for financial reporting
and income tax purposes at the enacted tax rates. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The effective tax rate differs from the statutory rate of 35%, principally due to the pass through
effect of passing the expenses of Compass Group Diversified Holdings, LLC onto the shareholders of
the Trust, and for state and foreign taxes.
Earnings per share
Basic and diluted income per share are computed on a weighted average basis. The weighted average
number of Trust shares outstanding for fiscal 2006 was computed based on 100 shares of Allocation
Interests outstanding for the period from January 1, 2006 through December 31, 2006, 19,500,000
Trust shares, for the period from May 16, 2006 through December 31, 2006 and 950,000 additional
Trust shares (issued in connection with the acquisition of Anodyne) for the period from August 1,
2006 through December 31, 2006.
The weighted average number of Trust shares outstanding for fiscal 2007 was computed based on
20,450,000 shares outstanding for the period from January 1, 2007 through December 31, 2007 and
9,875,000 additional shares outstanding issued in connection with the Companys secondary offering
for the period from May 8, 2007 through December 31, 2007, and 1,200,000 shares outstanding issued
in connection with the over-allotment for the period from May 20, 2007 through December 31, 2007.
The Company did not have any option plan or other potentially dilutive securities outstanding at
December 31, 2007.
F-12
The weighted average number of Trust shares outstanding for fiscal 2008 was computed based on
31,525,000 shares outstanding for the entire fiscal year. The Company did not have any option plan
or other potentially dilutive securities outstanding at December 31, 2008.
Advertising costs
Advertising costs are expensed as incurred and included in selling, general and administrative
expense in the consolidated statements of operations. Advertising costs were $5.5 million, $4.0
million and $2.4 million during the years ended December 31, 2008, 2007 and 2006, respectively.
Research and Development
Research and development costs are expensed as incurred and included in selling, general and
administrative expense in the consolidated statements of operations. The Company incurred research
and development expense of $3.5 million, $0.9 million and $0.7 million during the years ended
December 31, 2008, 2007 and 2006, respectively.
Loss on debt extinguishment
Loss on debt extinguishment for the year ended December 31, 2006 consisted of approximately $2.6
million incurred in prepayment fees and $5.7 million in unamortized debt issuance costs expensed in
connection with terminating the Initial Financing Agreement on November 21, 2006 (see Note K
Debt).
Employee retirement plans
The Company and many of its subsidiaries sponsor defined contribution retirement plans, such as
401(k) or profit sharing plans. Employee contributions to the plan are subject to regulatory
limitations and the specific plan provisions. The Company and its subsidiaries may match these
contributions up to levels specified in the plans and may make additional discretionary
contributions as determined by management. The total employer contributions to these plans were
$2.1 million, $1.3 million and $0.6 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Recent accounting pronouncements
In December 2007, the FASB issued SFAS No. 141R, Business Combinations or SFAS 141R. SFAS 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statement to evaluate the nature and financial effects of
the business combination. SFAS 141R is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Accordingly, any business combinations the Company engaged in
during 2008 were recorded and disclosed following existing GAAP. This Statement will have an
impact on future acquisitions that the Company makes in fiscal 2009. The Company expects SFAS No.
141R will have an impact on the consolidated financial statements when effective, but the nature
and magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions the Company consummates after the effective date.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51, or (SFAS 160), which the Company adopted on
January 1, 2009. SFAS 160 will significantly change the accounting and reporting related to a
non-controlling interest in a subsidiary. Specifically, this statement requires the recognition of
a non-controlling interest (minority interest) as equity in the consolidated financial statements
and separate from the parents equity. The amount of net income attributable to the non-controlling
interest will be included in consolidated net income on the face of the income statement. SFAS 160
clarifies that changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling financial interest.
In addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
non-controlling equity investment on the deconsolidation. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its non-controlling interest.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. After adoption, non-controlling interests will be classified as
shareholders equity, a change from its current classification between liabilities and
shareholders equity. Earnings attributable to minority interests will be included in net income,
although such earnings will continue to be deducted to measure earnings per share. Purchases and
sales of minority interests will be reported in equity.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 (SFAS 161). This statement is intended to
improve transparency in financial reporting by requiring enhanced disclosures of an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
results of operations and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) as
well as related hedged items, bifurcated derivatives, and non-derivative instruments that are
designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must
provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is
effective prospectively for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application permitted. The adoption of this standard
will not have a material impact on the notes to the consolidated financial statements.
F-13
On April 25, 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets. This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised
2007), Business Combinations, and other U.S. GAAP. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The adoption of this FSP may impact the useful lives the
Company assigns to intangible assets that are acquired through future business combinations.
On October 10, 2008, the FASB staff issued Staff Position (FSP) No. SFAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active, or (FSP 157-3),
which amends SFAS No. 157 by incorporating an example to illustrate key considerations in
determining the fair value of a financial asset in an inactive market. FSP 157-3 was effective on
October 10, 2008. The Company has adopted provisions of SFAS No. 157 and incorporated the
considerations of this FSP in determining the fair value of its financial assets. FSP 157-3 did
not have a material impact on the Companys consolidated financial statements.
Note C Acquisition of Businesses
From January 1, 2007 through December 31, 2008, the Company completed five acquisitions as follows:
|
|
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|
|
|
|
February 28, 2007 |
|
August 31, 2007 |
|
January 4, 2008 |
|
January 21, 2008 |
|
|
|
|
|
|
|
Aeroglide(1)
|
|
American Furniture
|
|
FOX
|
|
Staffmark(2) |
HALO |
|
|
|
|
|
|
|
|
|
(1) |
|
Aeroglide was subsequently disposed of on June 24, 2008.
|
|
(2) |
|
Staffmark was acquired by the CBS Personnel business segment. |
Allocation of Purchase Price
The acquisition of majority interests in each of the Companys businesses has been accounted for
under the purchase method of accounting. The preliminary purchase price allocation was based on
estimates of the fair value of the assets acquired and liabilities assumed. The fair values
assigned to the acquired assets were developed from information supplied by management and
valuations supplied by independent appraisal experts. The results of operations of each of the
Companys acquisitions are included in the consolidated financial statements from the date of
acquisition. In accordance with SFAS No. 141, a deferred tax liability aggregating $25.3 million
and $24.6 million, was recorded to reflect the net increase in the financial accounting basis of
the assets acquired over their related income tax basis in 2008 and 2007, respectively. Initial
purchase price allocations may be adjusted within one year of the purchase date for changes in
estimates of the fair value of assets acquired and liabilities assumed.
2007 Acquisitions
As part of the acquisitions of the HALO, Aeroglide and American Furniture businesses in 2007 the
Company allocated approximately $102.0 million of the purchase prices to goodwill. The Company
also allocated $70.1 million to customer relations in accordance with EITF 02-17, Recognition of
Customer Relationship Intangible Assets Acquired in a Business Combination. The Company will
amortize the amount allocated to customer relationships over useful lives ranging from 10 to 15
years. In addition, the Company allocated approximately $2.0 million of the purchase prices in
2007 to technology with an estimated useful life of 13 years and $6.1 million to non-compete
agreements and backlog with estimated useful lives ranging from less than one year to 3 years.
Intangible assets recorded include the value assigned to trade names of $14.8 million, which is not
subject to amortization.
F-14
2008 Acquisitions
Fox Factory
On January 4, 2008, Fox Factory Holding Corp., a subsidiary of the Company, entered into an
agreement with Fox Factory, Inc. (Fox) and Robert C. Fox, Jr., the sole shareholder of Fox, to
purchase all of the issued and outstanding capital stock of Fox. The Company made loans to and
purchased a controlling interest in Fox for approximately $80.4 million, representing approximately
75.5% of the outstanding common stock on a primary basis and 69.8% on a fully diluted basis. Fox
management invested in the transaction alongside CODI resulting in an initial minority ownership of
approximately 24.0%.
Headquartered in Watsonville, California, Fox is a designer, manufacturer and marketer of high end
suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road
vehicles. Fox acts both as a tier one supplier to leading action sport original equipment
manufacturers and provides after-market products to retailers and distributors.
In connection with the allocation of the purchase price and intangible asset valuation, goodwill of
$31.3 million and intangible assets subject to amortization of $44.2 million were recorded. The
intangible assets recorded include $11.7 million of customer relationships with useful lives
ranging from 8 to 12 years and $32.5 million of technology with an estimated useful life of 8
years. In addition, intangible assets recorded include the value assigned to trademarks of $13.3
million which is not subject to amortization. The Company does not expect the goodwill will be
deductible for tax purposes. Foxs results of operations are reported as a separate business
segment and are included in the Companys consolidated results of operations from the date of
acquisition.
The Companys Manager acted as an advisor to the Company in the transaction and received fees and
expense payments totaling approximately $0.8 million.
Staffmark
On January 21, 2008, the Companys majority-owned subsidiary, CBS Personnel, acquired Staffmark
Investment LLC (Staffmark), a privately held personnel services provider. Staffmark is a leading
provider of commercial staffing services in the United States. Staffmark provides staffing services
in more than 30 states through more than 200 branches and on-site locations. The majority of
Staffmarks revenues are derived from light industrial staffing, with the balance of revenues
derived from administrative and transportation staffing, permanent placement services and managed
solutions. Similar to CBS Personnel, Staffmark is one of the largest privately held staffing
companies in the United States. Under the terms of the purchase agreement, CBS Personnel purchased
all of the outstanding equity interests of Staffmark for a total purchase price of approximately
$128.6 million, exclusive of transaction fees and closing costs of $5.2 million. Staffmark has
become a wholly-owned subsidiary of CBS Personnel and Staffmarks results of operations are
included in the CBS Personnel business segment from the date of acquisition.
The aggregate purchase price consisted of cash and 1,929,089 shares of CBS Personnel common stock,
valued at approximately $47.9 million. The fair value of the CBS Personnel stock issued and
transferred to Staffmark as partial consideration in the acquisition was determined based on an
analysis of financial and market data of publicly traded companies deemed comparable to CBS
Personnel, together with relevant multiples of recent merged, sold or acquired companies comparable
to CBS Personnel.
The acquisition agreement pursuant to which CBS Personnel issued cash and 1,929,089 shares of CBS
Personnel common stock (the Staffmark stock) in exchange for all of the membership units of
Staffmark, gave the holders of Staffmarks membership units a non-transferable right (put right),
to direct the Company, on or after January 21, 2011, to either: (i) promptly initiate such
commercially reasonable actions that would result in a sale of CBS Personnel or (ii) offer to
purchase the Staffmark stock at its then fair market value, if such right was not otherwise
extinguished pursuant to the terms of the acquisition agreement. The put right is extinguishable at
any time if either a public offering of the shares of CBS Personnel or sale of CBS Personnel has
occurred.
In connection with the allocation of the purchase price and intangible asset valuation, goodwill of
$78.9 million and intangible assets subject to amortization of $50.1 million were recorded. The
intangible assets recorded include $24.5 million of customer relationships with an estimated useful
life of 12 years, $24.5 million of trademarks with an estimated useful life of 15 years and $1.1
million of licensing agreements with an estimated useful life of 3 years. The Company expects $58.4
million of goodwill will be deductible for tax purposes.
The Companys ownership percentage of CBS Personnel is 66.4% on a primary basis and 62.4% on a
fully diluted basis subsequent to the Staffmark acquisition.
F-15
The Companys Manager acted as an advisor to CBS Personnel in the transaction and received fees and
expense payments totaling approximately $1.2 million.
The estimated fair value of assets acquired and liabilities assumed that were accounted for as a
business combination relating to the acquisitions of the Companys businesses in 2008 and 2007 are
summarized below:
2008 Acquisitions
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|
|
|
|
|
(in thousands) |
|
FOX |
|
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Staffmark(2) |
|
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Total |
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|
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|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets(1) |
|
$ |
28,786 |
|
|
$ |
74,670 |
|
|
$ |
103,456 |
|
Property, plant and equipment, net |
|
|
5,552 |
|
|
|
3,545 |
|
|
|
9,097 |
|
Intangible assets, net |
|
|
57,500 |
|
|
|
50,055 |
|
|
|
107,555 |
|
Goodwill |
|
|
31,303 |
|
|
|
78,947 |
|
|
|
110,250 |
|
Other assets |
|
|
1,360 |
|
|
|
5,376 |
|
|
|
6,736 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
124,501 |
|
|
$ |
212,593 |
|
|
$ |
337,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
13,337 |
|
|
$ |
37,396 |
|
|
$ |
50,733 |
|
Other liabilities |
|
|
78,963 |
|
|
|
41,386 |
|
|
|
120,349 |
|
Minority interests |
|
|
7,725 |
|
|
|
|
|
|
|
7,725 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and minority interests |
|
$ |
100,025 |
|
|
$ |
78,782 |
|
|
$ |
178,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of net assets acquired |
|
$ |
24,476 |
|
|
$ |
133,811 |
|
|
$ |
158,287 |
|
Loans to businesses |
|
|
55,907 |
|
|
|
|
|
|
|
55,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
80,383 |
|
|
$ |
133,811 |
|
|
$ |
214,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $9.0 million in cash. |
|
(2) |
|
Staffmark was acquired by the CBS Personnel operating segment. |
2007 Acquisitions
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Aeroglide(2) |
|
|
HALO |
|
|
AFM |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets(1) |
|
$ |
15,517 |
|
|
$ |
25,468 |
|
|
$ |
35,898 |
|
|
$ |
76,883 |
|
Property, plant and equipment, net |
|
|
7,003 |
|
|
|
1,877 |
|
|
|
5,174 |
|
|
|
14,054 |
|
Intangible assets, net |
|
|
22,250 |
|
|
|
35,270 |
|
|
|
33,480 |
|
|
|
91,000 |
|
Goodwill |
|
|
29,239 |
|
|
|
32,120 |
|
|
|
40,598 |
|
|
|
101,957 |
|
Other assets |
|
|
903 |
|
|
|
1,050 |
|
|
|
1,652 |
|
|
|
3,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
74,912 |
|
|
$ |
95,785 |
|
|
$ |
116,802 |
|
|
$ |
287,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
14,327 |
|
|
$ |
16,377 |
|
|
$ |
7,378 |
|
|
$ |
38,082 |
|
Other liabilities |
|
|
39,000 |
|
|
|
55,908 |
|
|
|
80,674 |
|
|
|
175,582 |
|
Minority interests |
|
|
2,350 |
|
|
|
2,750 |
|
|
|
1,750 |
|
|
|
6,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and minority interests |
|
$ |
55,677 |
|
|
$ |
75,035 |
|
|
$ |
89,802 |
|
|
$ |
220,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of net assets acquired |
|
$ |
19,235 |
|
|
$ |
20,750 |
|
|
$ |
27,000 |
|
|
$ |
66,985 |
|
Loans to businesses |
|
|
39,000 |
|
|
|
41,576 |
|
|
|
69,969 |
|
|
|
150,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,235 |
|
|
$ |
62,326 |
|
|
$ |
96,969 |
|
|
$ |
217,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $1.7 million in cash. |
|
(2) |
|
See Note D. |
F-16
Unaudited Pro-forma Information
The following unaudited pro-forma data for the years ended December 31, 2008 and 2007 gives effect
to the 2008 Acquisitions as described above, as if the acquisitions had been completed as of
January 1, 2007. The pro forma data gives effect to actual operating results and adjustments to
interest expense, depreciation and amortization expense and minority interests in the acquired
businesses. The information is provided for illustrative purposes only and is not necessarily
indicative of the operating results that would have occurred if the transactions had been
consummated on the date indicated, nor is it necessarily indicative of future operating results of
the consolidated companies, and should not be construed as representative of these results for any
future period.
|
|
|
|
|
Year ended December 31, 2008 |
|
Total |
(in thousands, except per share data) |
|
|
Net sales |
|
$ |
1,569,545 |
|
Income from continuing operations before income taxes and minority interests |
|
|
9,592 |
|
Net income |
|
|
77,849 |
|
|
|
|
|
|
Basic and fully diluted income per share |
|
$ |
2.47 |
|
|
|
|
|
|
Year ended December 31, 2007 |
|
Total |
(in thousands, except per share data) |
|
|
Net sales |
|
$ |
1,530,781 |
|
Income from continuing operations before income taxes and minority interests |
|
|
9,244 |
|
Net income |
|
|
34,716 |
|
|
|
|
|
|
Basic and fully diluted income per share |
|
$ |
1.26 |
|
In addition to the acquisitions reflected above, the Companys subsidiaries, Anodyne and HALO,
acquired two add-on businesses during 2007 for a total purchase price aggregating approximately
$8.1 million. Goodwill totaling approximately $4.3 million was initially recorded in connection
with these transactions. In 2008, the Companys HALO subsidiary acquired three add-on businesses
for a total purchase price aggregating approximately $10.3 million. Goodwill of $6.8 million was
initially recorded in connection with these acquisitions. In addition to goodwill, HALO recorded
$2.7 million related to customer relationships with an estimated useful life of 15 years and $0.2
million of non-compete agreements with an estimated useful life of 3 years.
Note D Discontinued Operations
2007 Disposition
On January 5, 2007, the Company sold its majority owned subsidiary, Crosman Acquisition Corporation
(Crosman), for a total enterprise value of $143.0 million. The Companys share of the net
proceeds, after accounting for the redemption of Crosmans minority holders and the payment of
CGMs profit allocation, was approximately $110.0 million. The Company recognized a gain on the
sale in the first quarter of fiscal 2007 of approximately $36.0 million, or $1.77 per share.
The components of discontinued operations of the Crosman business segment for the period from May
16, 2006 to December 31, 2006, are as follows (in thousands):
|
|
|
|
|
|
|
Crosman |
|
|
|
For the Year |
|
|
|
Ended December 31, 2006 |
|
|
|
|
|
|
Net sales |
|
$ |
72,316 |
|
|
|
|
|
Operating income |
|
|
13,277 |
|
Other income |
|
|
182 |
|
Provision for income taxes |
|
|
3,367 |
|
Minority interests |
|
|
1,705 |
|
|
|
|
|
Income from discontinued
operations(1) |
|
$ |
8,387 |
|
|
|
|
|
|
|
|
(1) |
|
The results above exclude $3.2 million of intercompany interest expense. |
F-17
2008 Dispositions
On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide Corporation
(Aeroglide), for a total enterprise value of $95.0 million. The Companys share of the net
proceeds, after accounting for (i) redemption of Aeroglides minority holders; (ii) payment of
transaction expenses; and (iii) CGMs profit allocation; totaled $78.3 million. The Company
recognized a gain on the sale of $34.0 million, or $1.08 per share.
On June 25, 2008, the Company sold its majority owned subsidiary, Silvue Technologies Group, Inc.
(Silvue), for a total enterprise value of $95.0 million. The Companys share of the net
proceeds, after accounting for (i) redemption of Silvues minority holders; (ii) payment of
transaction expenses; and (iii) CGMs profit allocation; totaled $63.6 million. The Company
recognized a gain on the sale of $39.4 million, or $1.25 per share.
Approximately $65 million of the Companys net proceeds from the 2008 dispositions were used to
repay amounts outstanding under the Companys Revolving Credit Facility. The remaining net proceeds
from the 2008 dispositions were invested in short term investment-grade securities as of December
31, 2008.
Summarized operating results for the 2008 dispositions through the dates of the respective sales
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Aeroglide |
|
|
|
For the Period |
|
|
|
|
|
|
January 1, 2008 |
|
|
For the Year |
|
|
|
through Disposition |
|
|
Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
34,294 |
|
|
$ |
53,591 |
|
|
|
|
|
|
|
|
Operating income |
|
|
5,041 |
|
|
|
2,488 |
|
Other expense |
|
|
(11 |
) |
|
|
(17 |
) |
Provision (benefit) for income taxes |
|
|
1,274 |
|
|
|
(323 |
) |
Minority interests |
|
|
239 |
|
|
|
156 |
|
|
|
|
|
|
|
|
Income from discontinued
operations (1) |
|
$ |
3,517 |
|
|
$ |
2,638 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The results above for the period from January 1, 2008 through disposition exclude $1.6 million of
intercompany interest expense. |
|
The results for the year ended December 31, 2007 exclude $3.3 million of intercompany
interest expense. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silvue |
|
|
|
For the Period |
|
|
|
|
|
|
|
|
|
January 1, 2008 |
|
|
For the Year |
|
|
For the Year |
|
|
|
through Disposition |
|
|
Ended December 31, 2007 |
|
|
Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
11,465 |
|
|
$ |
22,521 |
|
|
$ |
15,700 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,416 |
|
|
|
5,536 |
|
|
|
2,962 |
|
Other expense |
|
|
(83 |
) |
|
|
(61 |
) |
|
|
(18 |
) |
Provision for income taxes |
|
|
933 |
|
|
|
1,846 |
|
|
|
1,362 |
|
Minority interests |
|
|
310 |
|
|
|
787 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations(1) |
|
$ |
1,090 |
|
|
$ |
2,842 |
|
|
$ |
1,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The results above for the period from January 1, 2008 through disposition exclude $0.6 million of
intercompany interest expense. |
|
The results for the year ended December 31, 2007 exclude $1.5 million of intercompany
interest expense. |
F-18
The following table presents summary balance sheet information for the 2008 dispositions as of
December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Aeroglide |
|
|
Silvue |
|
|
Total |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,901 |
|
|
$ |
1,957 |
|
|
$ |
3,858 |
|
Accounts receivable, net |
|
|
10,496 |
|
|
|
2,829 |
|
|
|
13,325 |
|
Inventory |
|
|
2,156 |
|
|
|
691 |
|
|
|
2,847 |
|
Earnings in excess of billings |
|
|
4,244 |
|
|
|
|
|
|
|
4,244 |
|
Other current assets |
|
|
432 |
|
|
|
737 |
|
|
|
1,169 |
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
$ |
19,229 |
|
|
$ |
6,214 |
|
|
$ |
25,443 |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
6,625 |
|
|
|
1,681 |
|
|
|
8,306 |
|
Goodwill |
|
|
29,863 |
|
|
|
18,461 |
|
|
|
48,324 |
|
Intangible assets, net |
|
|
17,512 |
|
|
|
23,408 |
|
|
|
40,920 |
|
Other non-current assets |
|
|
873 |
|
|
|
544 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
Non-current assets of discontinued operations |
|
$ |
54,873 |
|
|
$ |
44,094 |
|
|
$ |
98,967 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
5,454 |
|
|
|
650 |
|
|
|
6,104 |
|
Accrued expenses |
|
|
4,377 |
|
|
|
4,032 |
|
|
|
8,409 |
|
Deferred revenue |
|
|
10,756 |
|
|
|
|
|
|
|
10,756 |
|
Revolving credit facility |
|
|
|
|
|
|
2,814 |
|
|
|
2,814 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
20,587 |
|
|
$ |
7,496 |
|
|
$ |
28,083 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
377 |
|
|
|
9,375 |
|
|
|
9,752 |
|
Minority interests |
|
|
2,507 |
|
|
|
3,352 |
|
|
|
5,859 |
|
Other non-current liabilities |
|
|
|
|
|
|
188 |
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities of discontinued operations |
|
$ |
2,884 |
|
|
$ |
12,915 |
|
|
$ |
15,799 |
|
|
|
|
|
|
|
|
|
|
|
Note E Business Segment Data
At December 31, 2008, the Company had six reportable business segments. Each business segment
represents an acquisition (Staffmark is included in the CBS Personnel business segment). The
Companys reportable segments are strategic business units that offer different products and
services. They are managed separately because each business requires different technology and
marketing strategies.
A description of each of the reportable segments and the types of products and services from which
each segment derives its revenues is as follows:
|
|
|
Compass AC Holdings, Inc. (ACI or Advanced Circuits), an electronic components
manufacturing company, is a provider of prototype and quick-turn printed circuit boards.
ACI manufactures and delivers custom printed circuit boards to customers mainly in North
America. ACI is headquartered in Aurora, Colorado. |
|
|
|
|
American Furniture Manufacturing, Inc. (AFM or American Furniture) is a leading
domestic manufacturer of upholstered furniture for the promotional segment of the
marketplace. AFM offers a broad product line of
stationary and motion furniture, including sofas, loveseats, sectionals, recliners and
complementary products, sold primarily at retail price points ranging between $199 and $699.
AFM is a low-cost manufacturer and is able to ship any product in its line within 48 hours
of receiving an order. AFM is headquartered in Ecru, Mississippi and its products are sold
in the United States. |
|
|
|
|
Anodyne Medical Device, Inc. (Anodyne), a medical support surfaces company, is a
manufacturer of patient positioning devices primarily used for the prevention and treatment
of pressure wounds experienced by patients with limited or no mobility. Anodyne is
headquartered in Florida and its products are sold primarily in North America. |
|
|
|
|
CBS Personnel Holdings, Inc. (CBS or CBS Personnel), a human resources outsourcing
firm, is a provider of temporary staffing services in the United States. CBS Personnel
serves approximately 6,500 corporate and small business clients. CBS Personnel also offers
employee leasing services, permanent staffing and temporary-to-permanent placement
services. |
F-19
|
|
|
Fox Factory, Inc. (Fox) is a designer, manufacturer and marketer of high end
suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other
off-road vehicles. Fox acts as both a tier one supplier to leading action sport original
equipment manufacturers and provides after-market products to retailers and distributors.
Fox is headquartered in Watsonville, California and its products are primarily sold in
North America. |
|
|
|
|
HALO Branded Solutions, Inc. (HALO), operating under the brand names of HALO and Lee
Wayne, serves as a one-stop shop for over 40,000 customers providing design, sourcing,
management and fulfillment services across all categories of its customer promotional
product needs. HALO has established itself as a leader in the promotional products and
marketing industry through its focus on service through its approximately 1,000 account
executives. |
The tabular information that follows shows data of reportable segments reconciled to amounts
reflected in the consolidated financial statements. The operations of each of the businesses are
included in consolidated operating results as of their date of acquisition. Revenues from
geographic locations outside the United States were not material for each reportable segment,
except Fox, in each of the years presented below. Fox recorded net sales to locations outside the
United States of $92.5 million and $70.5 million for the years ended December 31, 2008 and 2007,
respectively. There were no significant inter-segment transactions.
Segment profit is determined based on internal performance measures used by the Chief Executive
Officer to assess the performance of each business. Segment profit excludes acquisition related
amounts and charges not pushed down to the segments and are reflected in Corporate and other.
A disaggregation of the Companys consolidated revenue and other financial data for the years ended
December 31, 2008, 2007 and 2006 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales of business segments |
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACI |
|
$ |
55,449 |
|
|
$ |
52,292 |
|
|
$ |
30,581 |
|
American Furniture |
|
|
130,949 |
|
|
|
46,981 |
|
|
|
|
|
Anodyne |
|
|
54,199 |
|
|
|
44,189 |
|
|
|
12,171 |
|
CBS Personnel |
|
|
1,006,345 |
|
|
|
569,880 |
|
|
|
352,421 |
|
Fox |
|
|
131,734 |
|
|
|
|
|
|
|
|
|
Halo |
|
|
159,797 |
|
|
|
128,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,538,473 |
|
|
|
841,791 |
|
|
|
395,173 |
|
Reconciliation of segment
revenues to consolidated
revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
$ |
1,538,473 |
|
|
$ |
841,791 |
|
|
$ |
395,173 |
|
|
|
|
|
|
|
|
|
|
|
F-20
Profit
of business segments (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACI |
|
$ |
17,665 |
|
|
$ |
17,078 |
|
|
$ |
7,483 |
|
American Furniture |
|
|
5,123 |
|
|
|
2,702 |
|
|
|
|
|
Anodyne |
|
|
4,228 |
|
|
|
2,936 |
|
|
|
(557 |
) |
CBS Personnel |
|
|
16,768 |
|
|
|
22,542 |
|
|
|
17,079 |
|
Fox |
|
|
10,707 |
|
|
|
|
|
|
|
|
|
Halo |
|
|
5,289 |
|
|
|
7,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
59,780 |
|
|
|
52,264 |
|
|
|
24,005 |
|
Reconciliation of segment profit to
consolidated income (loss)
from continuing operations before income
taxes and minority
interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(16,451 |
) |
|
|
(4,474 |
) |
|
|
(5,253 |
) |
Loss on debt extinguishment |
|
|
|
|
|
|
|
|
|
|
(8,275 |
) |
Other income (expense) |
|
|
894 |
|
|
|
(26 |
) |
|
|
489 |
|
Corporate and other (2) |
|
|
(33,880 |
) |
|
|
(28,545 |
) |
|
|
(35,003 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated income (loss) from
continuing operations before
income taxes and minority interest |
|
$ |
10,343 |
|
|
$ |
19,219 |
|
|
$ |
(24,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Segment profit represents operating income (loss). |
|
(2) |
|
Corporate and other consists of charges at the corporate level and purchase accounting
adjustments not pushed down to the segment. |
Accounts receivable and allowances
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
Accounts |
|
|
|
Receivable |
|
|
Receivable |
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
ACI |
|
$ |
3,131 |
|
|
$ |
2,913 |
|
American Furniture |
|
|
11,149 |
|
|
|
10,965 |
|
Anodyne |
|
|
6,919 |
|
|
|
8,687 |
|
CBS Personnel |
|
|
108,101 |
|
|
|
62,537 |
|
Fox |
|
|
10,201 |
|
|
|
|
|
Halo |
|
|
29,358 |
|
|
|
29,820 |
|
|
|
|
|
|
|
|
Total |
|
|
168,859 |
|
|
|
114,922 |
|
Reconciliation of segment to consolidated totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
168,859 |
|
|
|
114,922 |
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(4,824 |
) |
|
|
(3,204 |
) |
|
|
|
|
|
|
|
Total consolidated net accounts receivable |
|
$ |
164,035 |
|
|
$ |
111,718 |
|
|
|
|
|
|
|
|
F-21
Goodwill and identifiable
assets of business segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
Identifiable |
|
|
Identifiable |
|
|
for the Year |
|
|
|
Goodwill |
|
|
Goodwill |
|
|
Assets |
|
|
Assets |
|
|
Ended December 31, |
|
|
|
Dec. 31, 2008 |
|
|
Dec. 31, 2007 |
|
|
Dec. 31, 2008(3) |
|
|
Dec. 31, 2007(3) |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
ACI |
|
$ |
50,659 |
|
|
$ |
50,659 |
|
|
$ |
20,309 |
|
|
$ |
22,608 |
|
|
$ |
3,741 |
|
|
$ |
3,588 |
|
|
$ |
2,040 |
|
American Furniture |
|
|
41,435 |
|
|
|
41,471 |
|
|
|
67,752 |
|
|
|
71,110 |
|
|
|
3,704 |
|
|
|
1,160 |
|
|
|
|
|
Anodyne |
|
|
22,747 |
|
|
|
19,555 |
|
|
|
23,784 |
|
|
|
25,713 |
|
|
|
2,740 |
|
|
|
2,338 |
|
|
|
763 |
|
CBS Personnel |
|
|
139,715 |
|
|
|
60,768 |
|
|
|
84,947 |
|
|
|
24,808 |
|
|
|
8,214 |
|
|
|
2,316 |
|
|
|
1,372 |
|
Fox |
|
|
31,372 |
|
|
|
|
|
|
|
83,246 |
|
|
|
|
|
|
|
6,716 |
|
|
|
|
|
|
|
|
|
Halo |
|
|
40,184 |
|
|
|
33,381 |
|
|
|
46,291 |
|
|
|
41,645 |
|
|
|
3,157 |
|
|
|
2,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
326,112 |
|
|
|
205,834 |
|
|
|
326,329 |
|
|
|
185,884 |
|
|
|
28,272 |
|
|
|
11,682 |
|
|
|
4,175 |
|
Reconciliation of segment to
consolidated total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other identifiable
assets |
|
|
|
|
|
|
|
|
|
|
154,877 |
|
|
|
187,173 |
|
|
|
4,857 |
|
|
|
4,806 |
|
|
|
2,988 |
|
Identifiable assets of disc. ops.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,969 |
|
|
|
1,232 |
|
|
|
779 |
|
Goodwill
carried at Corporate level (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,983 |
|
|
|
12,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
339,095 |
|
|
$ |
218,817 |
|
|
$ |
481,206 |
|
|
$ |
497,467 |
|
|
$ |
35,098 |
|
|
$ |
17,720 |
|
|
$ |
7,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Not including accounts receivable scheduled above. |
|
|
|
(4) |
|
Represents goodwill resulting from purchase accounting adjustments not pushed down to the respective segment.
Goodwill is allocated back to the respective segment for purposes of impairment testing. |
Note F Inventories
Inventories are stated at the lower of cost or markets, determined on the first-in, first-out
method. Cost includes raw materials, direct labor and manufacturing overhead. Market value is
based on current replacement cost for raw materials and supplies and on net realizable value for
finished goods. Inventory is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
$ |
34,405 |
|
|
$ |
20,899 |
|
Finished goods |
|
|
17,571 |
|
|
|
15,062 |
|
Less: obsolescence reserve |
|
|
(1,067 |
) |
|
|
(469 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
50,909 |
|
|
$ |
35,492 |
|
|
|
|
|
|
|
|
Note G Property, Plant and Equipment
Property, plant and equipment is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Machinery, equipment and software |
|
$ |
26,024 |
|
|
$ |
12,062 |
|
Office furniture and equipment |
|
|
10,501 |
|
|
|
8,564 |
|
Leasehold improvements |
|
|
6,030 |
|
|
|
4,436 |
|
|
|
|
|
|
|
|
|
|
|
42,555 |
|
|
|
25,062 |
|
Less: accumulated depreciation |
|
|
(11,792 |
) |
|
|
(4,625 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
30,763 |
|
|
$ |
20,437 |
|
|
|
|
|
|
|
|
Depreciation expense was approximately $8.5 million, $3.8 million and $1.3 million for the years
ended December 31, 2008, 2007 and 2006, respectively.
F-22
Note H Commitments and Contingencies
Leases
The Company leases office facilities, computer equipment and software under operating arrangements.
The future minimum rental commitments at December 31, 2008 under operating leases having an
initial or remaining non-cancelable term of one year or more are as follows (in thousands):
|
|
|
|
|
2009 |
|
$ |
13,503 |
|
2010 |
|
|
10,828 |
|
2011 |
|
|
7,212 |
|
2012 |
|
|
5,514 |
|
2013 |
|
|
4,182 |
|
Thereafter |
|
|
11,962 |
|
|
|
|
|
|
|
$ |
53,201 |
|
|
|
|
|
The Companys rent expense for the fiscal years ended December 31, 2008, 2007 and 2006 totaled
$16.5 million, $8.3 million and $4.1 million, respectively.
Legal Proceedings
In the normal course of business, the Company and its subsidiaries are involved in various claims
and legal proceedings. While the ultimate resolution of these matters has yet to be determined,
the Company does not believe that their outcome will have a material adverse effect on the
Companys consolidated financial position or results of operations.
Note I Goodwill and Other Intangible Assets
A reconciliation of the change in the carrying value of goodwill for the periods ended December 31,
2008 and 2007 are as follows (in thousands):
|
|
|
|
|
Balance at January 1, 2007 |
|
$ |
140,690 |
|
Acquisition of businesses |
|
|
76,387 |
|
Adjustment to purchase accounting |
|
|
1,740 |
|
|
|
|
|
Balance at December 31, 2007 |
|
|
218,817 |
|
Acquisition of businesses |
|
|
117,031 |
|
Acquired goodwill in connection with Anodyne CEO promissory note (See Note R) |
|
|
3,191 |
|
Adjustment to purchase accounting |
|
|
56 |
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
339,095 |
|
|
|
|
|
Approximately $148.2 million of goodwill is deductible for income tax purposes at December 31,
2008.
F-23
Other intangible assets subject to amortization are comprised of the following at December 31, 2008
and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
December 31, |
|
|
Average |
|
|
|
2008 |
|
|
2007 |
|
|
Useful Lives |
|
|
Customer relationships |
|
$ |
187,669 |
|
|
$ |
148,216 |
|
|
|
12 |
|
Technology |
|
|
37,959 |
|
|
|
4,851 |
|
|
|
8 |
|
Trade names, subject to amortization |
|
|
24,500 |
|
|
|
|
|
|
|
12 |
|
Licensing and non-compete agreements |
|
|
4,416 |
|
|
|
161 |
|
|
|
3 |
|
Distributor relations and backlog |
|
|
1,380 |
|
|
|
4,330 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,924 |
|
|
|
157,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization customer relations |
|
|
(32,287 |
) |
|
|
(15,573 |
) |
|
|
|
|
Accumulated amortization technology |
|
|
(6,388 |
) |
|
|
(806 |
) |
|
|
|
|
Accumulated amortization trade names, subject to amortization |
|
|
(1,531 |
) |
|
|
|
|
|
|
|
|
Accumulated amortization licensing agreements and
anti-piracy covenants |
|
|
(2,369 |
) |
|
|
(808 |
) |
|
|
|
|
Accumulated amortization distributor relations and backlog |
|
|
(630 |
) |
|
|
(463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization |
|
|
(43,205 |
) |
|
|
(17,650 |
) |
|
|
|
|
Trade names, not subject to amortization (1) |
|
|
36,770 |
|
|
|
23,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
249,489 |
|
|
$ |
163,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On February 27, 2009, CBS Personnel rebranded its businesses under
the Staffmark brand. In connection with this rebrand, the CBS tradename
of $10.6 million |