This prospectus supplement summary highlights information contained elsewhere in this prospectus supplement and in the documents we file with the SEC that are incorporated by reference in this prospectus supplement. This summary is not complete and does not contain all of the information that you should consider before investing in our shares. You should read carefully the entire prospectus supplement and the accompanying prospectus and the information incorporated by reference in this prospectus supplement and accompanying prospectus, including “Risk Factors” included below and our consolidated financial statements and related notes included in our most recently filed Annual Report on Form 10-K, as amended, in each case as updated or supplemented by subsequent periodic reports that we file with the SEC, before making an investment decision. Further, unless the context otherwise indicates, numbers in this prospectus supplement have been rounded and are, therefore, approximate.

BUSINESS

 

Compass Diversified Holdings, a Delaware statutory trust, which we refer to as the trust, was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, which we refer to as the company, was also formed on November 18, 2005. The trust and the company 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 an operating entity with a board of directors whose corporate governance responsibilities are similar to that of a Delaware corporation. The company’s board of directors oversees the management of the company and our businesses and the performance of Compass Group Management LLC, which we refer to as our manager or CGM. 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:

 

 

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 that our management team’s strong relationships with industry executives, accountants, attorneys, business brokers, commercial and investment bankers, and other potential sources of acquisition opportunities offer us substantial opportunities to assess small to middle market businesses that may be available for acquisition. In addition, the flexibility, creativity, experience and expertise of our management team in structuring transactions allows us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.

In terms of the businesses in which we have a controlling interest as of March 31, 2009, we believe that these businesses have strong management teams, operate in strong markets with defensible market niches and maintain long standing customer relationships. We believe that the strength of this model, which provides for significant industry, customer and geographic diversity, will become even more apparent in the current challenging economic environment.

 

The following is a brief summary of the businesses in which we own a controlling interest at March 31, 2009.

 

Advanced Circuits

 

Compass AC Holdings, Inc., which we refer to as 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 from Compass Group Investments, Inc., which we refer to as CGI, 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.

 

American Furniture

 

AFM Holdings Corporation, which we refer to as 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 AFM’s outstanding stock on a primary basis and 84.5% on a fully diluted basis.

 

Anodyne

 

Anodyne Medical Device, Inc., which we refer to as Anodyne, with operations headquartered in Coral Springs, Florida, is a leading manufacturer of medical support surfaces and patient positioning devices used primarily for the prevention and treatment of pressure wounds experienced by patients with limited or no mobility. Anodyne is one of the nation’s 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 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 in Anodyne to approximately 67.0% on a primary basis and 57% on a fully diluted basis 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 then held by such CEO and (ii) exchanging term debt due from Anodyne, totaling $1.5 million, for shares of common and convertible preferred stock of Anodyne.

 

Staffmark

 

CBS Personnel Holdings, Inc., which is now known as Staffmark and which we refer to as Staffmark, headquartered in Cincinnati, Ohio, is a provider of temporary staffing services in the United States. In order to provide its more than 6,500 clients with tailored staffing services to fulfill their human resources needs, Staffmark also offers employee leasing services, permanent staffing and temporary-to-permanent placement services. We made loans to and purchased a controlling interest in Staffmark from CGI, on May 16, 2006, for approximately $128.0 million.

 

On January 21, 2008, CBS Personnel Holdings, Inc. acquired Staffmark Investment LLC for approximately $133.8 million, including fees and transaction costs. Like CBS Personnel Holdings, Inc., Staffmark Investment LLC is one of the leading providers of commercial staffing services in the United States, providing staffing services in over 30 states. CBS Personnel Holdings, Inc. repaid approximately $80.0 million in Staffmark Investment LLC

indebtedness and issued $47.9 million in CBS Personnel Holdings, Inc. common stock for all the equity interests in Staffmark Investment LLC.

 

In April 2009, we amended the Staffmark intercompany credit agreement with us which, among other things, recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of debt for Staffmark common stock. A minority shareholder participated in this exchange. As a result of this transaction, we currently own 75.7% of the outstanding stock of Staffmark on a primary basis and 73.3% on a fully diluted basis.

 

Fox

 

Fox Factory Holding Corp., which we refer to as 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 and provides after-market products to retailers and distributors. Fox’s products are recognized as the industry’s performance leaders by retailers and end-users alike. We made loans to and purchased a controlling interest in Fox, on January 4, 2008, for approximately $80.4 million, representing approximately 75.5% of the outstanding common stock on a primary basis and 68.0% on a fully diluted basis.

 

HALO

 

Halo Lee Wayne LLC, which we refer to as HALO, operating under the brand names of HALO and Lee Wayne, with operations headquartered in Sterling, Illinois, serves as a one-stop shop for over 35,000 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 900 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% on a fully diluted basis.

Current Organizational Structure

 

 

 

SUMMARY FINANCIAL DATA

 

The following table sets forth selected historical and other data of the Company and should be read in conjunction with the more detailed consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, as supplemented by our Current Report on Form 8-K filed with the SEC on May 19, 2009.

 

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 initial public offering, which we refer to as 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 our initial businesses.

 

The operating results for Crosman Acquisition Corporation are reflected as discontinued operations in 2006 and as such are not included in the operating data below. The operating results for Aeroglide Holdings, Inc. are reflected as discontinued operations in 2008 and 2007 and as such are not included in the operating data below. The operating results for Silvue Technologies Group, Inc. are reflected as discontinued operations in 2008, 2007 and 2006 and as such are not included in the operating data below. Financial data included below only includes activity in our current operating subsidiaries from their respective dates of acquisition. Net income and gains on the sales of Crosman, Aeroglide and Silvue are reflected below in income and gain from discontinued operations.

 

 

 

 

 

The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management’s estimate of cash flow available for distribution and reinvestment, which we refer to as 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 future CAD, together with our cash balances and access to cash via our revolving credit facility, will be sufficient to meet our anticipated distributions over the next twelve months. For a discussion of certain risks related to, and restrictions on, our ability to pay such distributions, see the section entitled “Risk Factors — We may not have sufficient cash flows from our businesses and other capital resources, including borrowings, to maintain our current level of distributions, increase our distributions or pay distributions at all due to poor performance of our business or other factors” and the section entitled “Dividend and Distribution Policy.” 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.

 

 

 

 

Cash flows of certain of our businesses are seasonal. Cash flows from American Furniture are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Cash flows from Staffmark are typically lower in the first quarter of each year than in other quarters due to reduced seasonal demand for temporary staffing services and to lower gross margins during that period associated with the front-end loading of certain taxes and other payments associated with payroll paid to their 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 over two-thirds of its operating income in the months of September through December

THE OFFERING

 

 

 

(1) Excludes shares that may be issued to the underwriters pursuant to their overallotment option. If the underwriters exercise their overallotment option in full, the total number of shares offered will be 5,865,000. We had 31,525,000 shares outstanding at March 31, 2009.

(2) The number of shares that will be outstanding after this offering is based on the number of shares outstanding on March 31, 2009 and assumes no exercise by the underwriters of their over allotment option.

RISK FACTORS

 

An investment in our shares involves risk. You should carefully read and consider all of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, as supplemented by the discussion below, before making a decision to invest in our shares. If any of the following events occur, our financial condition, business and results of operations (including cash flows) may be materially adversely affected. In that event, the market price of our shares could decline, we may be unable to pay distributions on our shares and you could lose all or part of your investment.

 

Risks Related to this Offering

 

Our earnings and cash distributions may affect the market price of our shares.

 

Generally, the market price of our shares may be based, in part, on the market’s perception of our growth potential and our current and potential future cash distributions, whether from operations, sales, acquisitions or refinancings, and on the value of our businesses. For that reason, our shares may trade at prices that are higher or lower than our net asset value per share. If we do not maintain our current level of distributions due to our lack of sufficient cash flows or other factors, the market price of our shares may be materially adversely affected. As described in the risk factor below, there are various risks and uncertainties with respect to our having sufficient cash flows for distributions and reinvestment, including risks with respect to the performance of our businesses. In addition, should we retain operating cash flow for investment purposes or working capital reserves instead of distributing the cash flows to our shareholders, the retained funds, while increasing the value of our underlying assets, may materially adversely affect the market price of our shares. Our failure to meet market expectations with respect to earnings and cash distributions could materially adversely affect the market price of our shares. See the section entitled “Dividend and Distribution Policy” for more information about restrictions on our ability to make cash distributions.

 

If the market price of our shares declines, you may be unable to resell your shares at or above the public offering price. We cannot assure you that the market price of our shares will not fluctuate or decline significantly, including a decline below the public offering price, in the future.

 

We may not have sufficient cash flows available for distribution and reinvestment from our businesses and other capital resources, including borrowings, to maintain our current level of distributions, increase our distributions or pay distributions at all due to poor performance of our businesses or other factors.

 

You should not rely on our history of maintaining or increasing our level of cash distributions to our shareholders as an indicator of our ability to pay, or a guarantee of, future distributions. Our distribution policy is based on our expectation of predictable and stable cash flows from our businesses. For the first quarter of 2009, our businesses had negative cash flow available for distribution and reinvestment, or CAD, of approximately $0.4 million, and we funded the entire first quarter distribution paid on April 30, 2009, of $0.34 per share, or $10.7 million in total, using CAD from prior periods that was not distributed and was held as cash on our balance sheet. For the next twelve months, we do not expect our businesses to generate sufficient CAD to pay cash distributions to our shareholders at the current level. If our board of directors decides, in its sole discretion, to continue to pay cash distributions at the current level, we will need to use existing cash on our balance sheet, the proceeds from this offering, or, if available, borrowings under our revolving credit facility, to fund some or all of such distributions. These capital resources may not be sufficient to fund the difference between CAD being generated by our businesses during the next twelve months and cash distributions to our shareholders at the current level, or at a decreased level, depending on a number of factors. These factors, many of which are beyond our control, include the performance of our businesses, their need for capital, our debt service obligations and level of other expenses, unforeseen liabilities, our compliance with the financial and other covenants in our credit agreement and other potential restrictions on our ability to pay distributions, as further described under the section entitled “Dividend and Distribution Policy — Restrictions on Distribution Payments.” We may only borrow under our revolving credit facility to pay distributions if we are in compliance with such covenants and if there is available borrowing capacity after funding the needs of our businesses and corporate level expenses. We cannot assure you we will be in compliance with such covenants or have such availability. Our ability to pay cash distributions is also

affected by dispositions and our ability to find new acquisitions to replace cash flows lost due to dispositions. We may not be able to successfully make such new acquisitions.

 

We have broad discretion in using the net proceeds of this offering. Our failure to effectively use these proceeds could adversely affect our ability to earn profits.

 

We intend to use the net proceeds for general corporate purposes, including add-on acquisitions to our existing businesses and the acquisition of other businesses or to make distributions to our shareholders. If we fail to identify desirable acquisition targets, or fail to effectively consummate such acquisitions, or we use the net proceeds to fund distributions, our ability to earn profits could be adversely affected.

 

Future sales of shares may cause the market price of our shares to decline.

 

We cannot predict what effect, if any, future sales of our shares, or the availability of shares for future sales, will have on the market price of our shares. Sales of substantial amounts of our shares in the public market following this offering, or the perception that such sales could occur, could materially adversely affect the market price of our shares and may make it more difficult for you to sell your shares at a time and price which you deem appropriate. A decline below the offering price is possible. After the consummation of this offering, there will be 36,625,000 shares of the trust issued and outstanding (or 37,390,000 shares if the underwriters exercise their overallotment option in full).

 

We and our officers, directors and certain of our affiliates have agreed that, with limited exceptions, we and they will not directly or indirectly, without the prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the underwriters, offer to sell, sell or otherwise dispose of any shares for a period of 90 days after the date of this prospectus.

 

We may issue additional debt and equity securities which are senior to our shares as to distributions and in liquidation, which could materially adversely affect the market price of our shares and result in dilution to our shareholders.

 

In the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financing that is secured by all or up to all of our assets, or issuing debt or equity securities, which could include issuances of commercial paper, medium-term notes, senior notes, subordinated notes or equity securities, including preferred securities. In addition, we may issue our shares as consideration for future acquisitions. In the event of our liquidation, our lenders and holders of our debt securities would receive a distribution of our available assets before distributions to our shareholders. Any preferred securities, if issued, may have a preference with respect to distributions upon liquidation, which could further limit our ability to make distributions to our shareholders. Because our decision to incur debt and issue securities in any future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financing. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. Thus, you will bear the risk of our future offerings reducing the value of your shares and diluting your interest in us. In addition, we can change our leverage strategy from time to time without shareholder approval, which could materially adversely affect the market share price of our shares.

 

The market price, trading volume and marketability of our shares may, from time to time, be significantly affected by numerous factors beyond our control, which may materially adversely affect the market price of your shares and our ability to raise capital through future equity financings.

 

The market price and trading volume of our shares may fluctuate significantly. Many factors that are beyond our control may significantly affect the market price and marketability of our shares and may materially adversely affect our ability to raise capital through equity financings. These factors include: price and volume fluctuations in the stock markets generally which create highly variable and unpredictable pricing of equity securities; significant volatility in the market price and trading volume of securities of companies in the sectors in which our businesses operate, which may not be related to the operating performance of these companies and which may not reflect the performance of our businesses; changes and variations in our earnings and cash flows; any shortfall in revenue or net

income or any increase in losses from levels expected by securities analysts; changes in regulation or tax law; operating performance of companies comparable to us; general economic trends and other external factors including inflation, interest rates, and costs and availability of raw materials, fuel and transportation; and loss of a major funding source.

 

We estimate that our net proceeds from the sale of 5,100,000 shares in this offering will be approximately $42,102,575 (or approximately $48,500,461 if the underwriters’ overallotment option is exercised in full), at a public offering price of $8.85 per share, and after deducting underwriting discounts and commissions of approximately $2,482,425 (or approximately $2,854,789 if the underwriters’ overallotment option is exercised in full) and estimated public offering costs of approximately $550,000. We intend to use the net proceeds from this offering for general corporate purposes, including to fund acquisitions, if and when identified and consummated, or to make distributions to our shareholders.

 

The following table sets forth our unaudited pro forma capitalization, assuming no exercise of the underwriters’ overallotment option, assuming a public offering price of $8.85 per share, and the application of the estimated net proceeds of such sale (after deducting underwriting discounts and commissions and our estimated offering costs). “As Adjusted” reflects the application of the net proceeds of this offering. This table should be read in conjunction with “Use of Proceeds,” and our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, as supplemented by our Current Report on Form 8-K filed with the SEC on March 19, 2009.

 

 

 

 

Our shares trade on the Nasdaq Global Select Market under the symbol “CODI.” On June 3, 2009, the last reported sale price of our shares on the Nasdaq Global Select Market was $9.72 per share. The following table sets forth, for the periods indicated, the high and low closing prices of the shares as reported on the Nasdaq Global Select Market.

 

 

As of March 31, 2009, there were 31,525,000 of our shares issued and outstanding. As of May 27, 2009, there were ten holders of record; however, we believe the number of beneficial owners of our shares is approximately 9,900.

 

The company’s board of directors intends to declare and pay regular quarterly cash distributions on all outstanding shares. The company’s board of directors intends to set each distribution on the basis of the current results of operations of our businesses and other resources available to the company, including the company’s revolving credit facility, and the desire to provide sustainable levels of distributions to our shareholders.

 

Our distribution policy is based on the predictable and stable cash flows of our businesses and our intention to provide sustainable levels of distributions to our shareholders while reinvesting a portion of our cash flows in our businesses or in the acquisition of new businesses. If we successfully implement our strategy, we expect to maintain and increase the level of our distributions to shareholders in the future.

 

The declaration and payment of any future distribution will be subject to the approval of a majority of the company’s board of directors. The board of directors will at all times include a majority of independent directors. The company’s board of directors will take into account such matters as general business conditions, our financial condition, results of operations, capital requirements and any contractual, legal and regulatory restrictions on the payment of distributions by us to our shareholders or by our subsidiaries to us, and any other factors that the board of directors deems relevant. However, even in the event that the company’s board of directors were to decide to declare and pay distributions, our ability to pay such distributions may be adversely impacted due to unknown liabilities, government regulations, financial covenants of the debt of the company, funds needed for acquisitions and to satisfy short- and long-term working capital needs of our businesses, or if our businesses do not generate sufficient earnings and cash flow to support the payment of such distributions. In particular, we may incur debt in the future to acquire new businesses, which debt will have substantial payment obligations, which must be satisfied before we can make distributions. These factors could affect our ability to continue to make distributions. See the section entitled “Risk Factors” for more information about these risks and other risks affecting us and our businesses.

 

We may use cash flow from our businesses, the capital resources of the company, including borrowings under the company’s revolving credit facility, or a reduction in equity to pay a distribution. For example, our cash distribution for the first quarter of 2009 of $0.34 per share was paid entirely out of capital resources other than CAD generated from our businesses during such period, which was negative. See the section entitled “Material U.S. Federal Income Tax Considerations” for more information about the tax treatment of distributions to our shareholders.

 

Restrictions on Distribution Payments

 

We are dependent upon the ability of our businesses to generate earnings and cash flow and to make distributions to us in the form of interest and principal payments on indebtedness and distributions on equity to enable us to, first, satisfy our financial obligations, including payments under our revolving credit facility, the management fee, profit allocation and put price, and, second, make distributions to our shareholders. There is no guarantee that we will continue to make quarterly distributions. Our ability to make quarterly distributions may be subject to certain restrictions, including:

 

 

 

As a consequence of these various restrictions, we may not be able to declare, or may have to delay or cancel payment of, distributions to our shareholders.

 

Because the company’s board of directors intends to continue to declare and pay regular quarterly cash distributions on all outstanding shares, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. We expect that we will rely upon external financing sources, including issuances of debt or debt-like financing arrangements and the issuance of debt and equity securities, to fund our acquisitions and expansion of capital expenditures. As a result, to the extent we are unable to finance growth externally, our decision to declare and pay regular quarterly distributions will significantly impair our ability to grow.

 

Our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our control. Therefore, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Likewise, holders of our shares may be diluted pursuant to additional equity issuances.

 

Morgan Stanley & Co. Incorporated is acting as sole book-running manager for this offering and representative of the underwriters named below. Under the terms and subject to the conditions stated in the underwriting agreement dated June 4, 2009, each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter’s name.

 

 

The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the overallotment option described below) if they purchase any of the shares.

 

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to an additional 765,000 shares at the price initially offered to the public, less the underwriting discount and commissions. The underwriters may exercise the option solely for the purpose of covering overallotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter’s initial purchase commitment.

 

The shares are quoted on the Nasdaq Global Select Market under the symbol “CODI.” The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus supplement and some of the shares to dealers at the public offering price less a concession not to exceed $0.292 per share. If all of the shares are not sold at the initial offering price, the underwriters may change the public offering price and the other selling terms.

 

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ overallotment option to purchase additional shares.

 

 

We estimate that our total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately $550,000.

 

We and our officers, directors and certain of our affiliates have agreed with the underwriters that, subject to certain exceptions, for a period of 90 days from the date of this prospectus supplement not to (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares or any securities convertible into or exercisable or exchangeable for trust shares or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the trust shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of trust

shares or such other securities, in cash or otherwise. Morgan Stanley & Co. Incorporated in its sole discretion may release any of the securities subject to these restrictions at any time without notice. In addition, for a period of 90 days after the date of this prospectus supplement, we may not, without the prior written consent of Morgan Stanley & Co. Incorporated, file any registration statement with the SEC relating to the offering of any trust shares or any securities convertible into or exercisable or exchangeable for trust shares.

 

Notwithstanding the foregoing, the underwriters have agreed in the underwriting agreement that the foregoing restrictions will not apply to (a) the shares to be sold hereunder, (b) the issuance by us of trust shares upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the underwriters have been advised in writing, or (c) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of trust shares, provided that such plan does not provide for the transfer of trust shares during the 90-day restricted period.

 

In addition, the underwriters have agreed that the foregoing restrictions on our officers, directors and certain of our affiliates will not apply to (a) transactions relating to trust shares or other securities acquired in open market transactions after the completion of the offering; provided that no filing under Section 16(a) of the Exchange Act, shall be required or shall be voluntarily made in connection with subsequent sales of trust shares or other securities acquired in such open market transactions, (b) transfers of shares to any trust, corporation, partnership or other entity for the direct or indirect benefit of the undersigned or the immediate family of the undersigned provided that any such transfer shall not involve a disposition for value, (c) transfers of shares to any corporation, limited liability company, limited partnership or general partnership of which all of the equity interest is owned by the undersigned or the immediate family of the undersigned or one or more entities described in clause (b) above, (d) the transfer of the holder’s shares by operation of law, such as rules of intestate succession or statutes governing the effects of a merger, (e) transfers of shares pursuant to a qualified domestic relations order, (f) transfers of shares or any security convertible into trust shares as a bona fide gift, (g) distributions of shares or any security convertible into shares to limited partners or stockholders of the undersigned; provided that in the case of any transfer or distribution pursuant to clause (b), (c), (d), (e), (f) or (g), (1) each transferee, donee or distributee shall sign and deliver a lock-up letter substantially in the form of this letter and (2) no filing under Section 16(a) of the Exchange Act, reporting a reduction in beneficial ownership of shares, shall be required or shall be voluntarily made during the restricted period referred to in the foregoing sentence, or (h) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares; provided that such plan does not provide for the transfer of shares during the restricted period. In addition, each of such officers, directors and affiliates has agreed with the underwriters that, without the prior written consent of Morgan Stanley & Co. Incorporated, such person or entity will not, for a period of 90 days after the date of this prospectus supplement, make any demand for or exercise any right with respect to the registration of any trust shares or any security convertible into or exercisable or exchangeable for trust shares.

 

We have agreed to indemnify the underwriters and persons who control the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make because of any of those liabilities.

 

In connection with the offering, the underwriters, may engage in stabilizing transactions, short sales, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

 

 

 

These stabilizing transactions, short sales, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares or preventing or retarding a decline in the market price of the shares. As a result, the price of our shares may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Global Select Market or otherwise and, if commenced, may be discontinued at any time.

 

In connection with this offering, the underwriters (and selling group members) may engage in passive market making transactions in the shares on the Nasdaq Global Select Market, prior to the pricing and completion of the offering. Passive market making consists of displaying bids on the Nasdaq Global Select Market no higher than the bid prices of independent market makers and making purchases at prices no higher than those independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker’s average daily trading volume in the shares during a specified period and must be discontinued when that limit is reached. Passive market making may cause the price of the shares to be higher than the price that otherwise would exist in the open market in the absence of those transactions. If the underwriters commence passive market making transactions, they may discontinue them at any time.

 

No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares or the possession, circulation or distribution of this prospectus supplement, the accompanying prospectus or any other material relating to us or the shares in any jurisdiction where action for that purpose is required. Accordingly, the shares may not be offered or sold, directly or indirectly, and this prospectus supplement, the accompanying prospectus or any other offering material or advertisements in connection with the shares may not be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.

 

Purchasers of the shares offered by this prospectus supplement and the accompanying prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price on the cover page of this prospectus supplement.

 

The shares are being offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the underwriters and other conditions. The underwriters reserve the right to withdraw, cancel or modify this offer and to reject orders in whole or in part.

 

The prospectus supplement and the accompanying prospectus in electronic format may be made available on the website maintained by one or more of the underwriters. The representative may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representative will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

 

Certain of the underwriters and their affiliates have in past provided to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect

transactions for their own account or the account of their customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

 

European Economic Area

 

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, with effect from and including the date on which the Prospectus Directive is implemented in that Member State, an offer of the shares described in this prospectus supplement may not be made to the public in that Member State, except that it may, with effect from and including such date, make an offer of shares to the public in that Member State:

 

(a) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

 

(b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

 

(c) at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For the purposes of the above, the expression an “offer of shares to the public” in relation to any shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.

 

United Kingdom

 

Each underwriter has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the shares in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares in, from or otherwise involving the United Kingdom.

 

The validity of the shares being offered hereby will be passed upon for us by Richards, Layton & Finger, P.A., Wilmington, Delaware. Certain other legal matters in connection with the shares being offered hereby will be passed upon for us by Squire, Sanders & Dempsey L.L.P., Cincinnati, Ohio. Attorneys at Squire, Sanders & Dempsey L.L.P. beneficially own an aggregate of approximately 77,259 shares of the trust. Certain legal matters will be passed upon for the underwriters by Cravath, Swaine & Moore LLP.

 

The consolidated financial statements of Compass Diversified Holdings as at December 31, 2008 and 2007 and for the three-year period ending December 31, 2008 (incorporated into this prospectus supplement by reference to our Annual Report on Form 10-K for the year ended December 31, 2008, as amended and supplemented by our Current Report on Form 8-K filed with the SEC on May 19, 2009) have been audited by Grant Thornton LLP, independent registered public accountants, as set forth in their reports therein and incorporated herein by reference in reliance upon such reports given the authority of such firm as experts in accounting and auditing.

Shares

 

 

 

Each Share Represents
One Beneficial Interest
in Compass Diversified Holdings

 

 

Compass Diversified Holdings may sell, from time to time, shares of the trust, each representing one undivided beneficial interest in the trust property. The purpose of the trust is to hold 100% of the trust interests of Compass Group Diversified Holdings LLC, which we refer to as the company. Each beneficial interest in the trust corresponds to one trust interest of the company. We may offer for sale the shares covered by this prospectus directly to purchasers or through underwriters, broker-dealers or agents, in public or private transactions, at prevailing market prices or at privately negotiated prices. For additional information on the methods of sale, you should refer to the section of this prospectus entitled “Plan of Distribution.”

 

The shares trade on the Nasdaq Global Select Market under the symbol “CODI.” On May 22, 2009, the closing price of the shares on the Nasdaq Global Select Market was $8.90 per share.

 

We will provide more specific information about the terms of an offering of these shares in supplements or term sheets to this prospectus. This prospectus may not be used to offer or sell shares unless accompanied by a prospectus supplement or term sheet. You should read this prospectus, the prospectus supplements and term sheets carefully before you invest. If any underwriters, broker-dealers or agents are involved in any offering, the names of such underwriters, broker-dealers or agents an any applicable commissions or discounts will be described in the applicable prospectus supplement or term sheet relating to the offering.

 

Investing in our shares involves risks. See the description of “Risk Factors” which begins on page 2.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is June 1, 2009

 

TABLE OF CONTENTS

 

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus may be used only for the purpose for which it has been published, and no person has been authorized to give any information not contained in this prospectus. If you receive any other information, you should not rely on it. We are not making an offer of these securities in any jurisdiction where the offer is not permitted.

 

In reading this registration statement, references to:

 

 

This prospectus is part of a registration statement on Form S-3 that we filed with the Securities and Exchange Commission, which we refer to as the SEC, using a “shelf” registration process. Under this shelf process, we may sell the shares covered by this prospectus in one or more offerings as described under “Plan of Distribution” in this prospectus.

 

This prospectus provides you with a general description of the shares that we may offer. Each time that we offer shares, we will provide a prospectus supplement or term sheet that will contain specific information about the terms of that offering. The prospectus supplement or term sheet may also add to, update or change information contained in this prospectus. Any statement that we make in this prospectus will be modified or superseded by any inconsistent statement made by us in a prospectus supplement or term sheet. You should read both this prospectus and any accompanying prospectus supplement or term sheet together with the additional information described under the heading “Incorporation of Certain Documents by Reference.”

 

The prospectus supplement or term sheet to be attached to the front of this prospectus will describe: the applicable public offering price, the price paid for the shares, the net proceeds, the manner of distribution and any underwriting compensation and the other specific material terms related to the offering of shares covered by this prospectus.

 

For more detail on the terms of the shares offered, see “Description of Shares.”

 

This prospectus, including the sections entitled “Summary” and “Risk Factors,” contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on our current expectations, estimates and projections. Pursuant to those sections, we may obtain a “safe harbor” for forward-looking statements by identifying those statements and by accompanying those statements with cautionary statements, which identify factors that could cause actual results to differ from those expressed in the forward-looking statements. We may, in some cases, use words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” or “may” or other words that convey uncertainty of future events or outcomes to

identify these forward-looking statements. Forward-looking statements in this prospectus are subject to a number of risks and uncertainties, some of which are beyond our control, including among other things:

 

 

Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. A description of some of the risks that could cause our actual results to differ appears under the section “Risk Factors” and elsewhere in this prospectus or incorporated herein by reference. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.

 

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

 

This prospectus summary highlights information contained elsewhere in this prospectus and in the documents we file with the Securities and Exchange Commission that are incorporated by reference in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our shares. You should read the entire prospectus and the information incorporated by reference in this prospectus carefully, including “Risk Factors” included below and our consolidated financial statements and related notes included in our most recently filed Annual Report on Form 10-K in each case as updated or supplemented by subsequent periodic reports that we file with the Securities and Exchange Commission, before making an investment decision. Further, unless the context otherwise indicates, numbers in this prospectus have been rounded and are, therefore, approximate.

 

Overview

 

Compass Diversified Holdings, which we refer to as the trust, acquires and owns its businesses through a Delaware limited liability company, Compass Group Diversified Holdings LLC, which we refer to as the company and, together with the trust, CODI, us and we. See the section entitled “Description of Shares” for more information about certain terms of the shares, trust interests and allocation interests.

 

The trust offers investors an opportunity to participate in the ownership and growth of middle market businesses that traditionally have been owned and managed by private equity firms or other financial investors, large conglomerates or private individuals or families. Through the ownership of a diversified group of middle market businesses, we also offer investors an opportunity to diversify their portfolio risk while participating in the cash flows of our businesses through the receipt of quarterly distributions.

 

We acquire and manage middle market businesses based in North America that generate annual cash flows of up to $60 million. We seek to acquire controlling ownership interests in such businesses in order to maximize our ability to work actively with the management teams of those businesses. Our model for creating shareholder value is to be disciplined in identifying and valuing businesses, to work closely with management of the businesses we acquire to grow the cash flows of those businesses, and to exit opportunistically businesses when we believe that doing so will maximize returns. We currently own six businesses in six distinct industries and we believe that these businesses will continue to produce stable and growing cash flows over the long term, enabling us to meet our objectives of growing distributions to our shareholders, independent of any incremental acquisitions we may make, and investing in the long-term growth of the company.

 

Our Manager

 

We have entered into a management services agreement with Compass Group Management LLC, who we refer to as our manager or CGM, pursuant to which our manager manages the day-to-day operations and affairs of the company and oversees the management and operations of our businesses. While working for a subsidiary of Compass Group Investments, Inc., our management team originally oversaw the acquisition and operations of each of our initial businesses and Anodyne Medical Device, Inc. prior to our acquiring them from Compass Group Investments, Inc.

 

Corporate Structure

 

The trust is a Delaware statutory trust. Our principal executive offices are located at Sixty One Wilton Road, Second Floor, Westport, Connecticut 06880, and our telephone number is 203-221-1703. Our website is at www.compassdiversifiedholdings.com. The information on our website is not incorporated by reference and is not part of this prospectus.

 

Each share of the trust represents one undivided beneficial interest in the trust property. The purpose of the trust is to hold the trust interests of the company, which is one of two classes of equity interests in the company — the trust interests, of which 100% are held by the trust, and allocation interests, of which 100% are held by our manager. The trust has the authority to issue shares in one or more series. See the section entitled “Description of Shares” for more information about the shares, trust interests and allocation interests.

 

5,100,000 Shares

 

 

 

EACH SHARE REPRESENTS
ONE BENEFICIAL INTEREST
IN COMPASS DIVERSIFIED HOLDINGS

 

 

 

Prospectus Supplement
June 4, 2009

 

 

 

MORGAN STANLEY

 

JANNEY MONTGOMERY SCOTT
MORGAN KEEGAN & COMPANY, INC.
RBC CAPITAL MARKETS
STIFEL NICOLAUS